Assumable mortgage: What is it and how does it work?
- Assumable mortgages allow homebuyers to take over an existing loan with potentially favorable terms, such as lower interest rates and reduced closing costs.
- Not all mortgages are assumable. Government-backed loans—such as FHA, VA and USDA loans—are generally assumable. However, conventional loans usually aren’t, except in certain situations like death or divorce.ownership-of-a-home-fannie-mae
- Buyers must meet specific lender requirements in order to assume a mortgage from a seller.
Assumable mortgages present a unique opportunity for homebuyers to take over an existing loan, often with favorable terms like lower interest rates, shorter loan durations and no down payments. While the financial benefits can be substantial, it’s important to carefully consider the potential costs, risks and the approval process involved.
This guide will cover the fundamentals about assumable mortgages and help you determine if this option aligns with your homebuying goals.
What is an assumable mortgage?
An assumable mortgage allows buyers to take over a seller's existing home loan, including its interest rate, payment schedule and remaining balance. Instead of securing a new loan, you step directly into the seller’s position, continuing their monthly payments under the original terms of their loan.
What types of mortgage loans are assumable?
Buyers typically can’t assume a conventional mortgage. However, certain government-backed loans—such as FHA, VA and USDA loans—are assumable. To assume one of these types of mortgages, you’ll need to meet specific credit score, income and debt-to-income ratio requirements, as each of these loans have their own specific terms and conditions.
FHA loans
FHA loans, designed to help first-time homebuyers and those with lower credit scores secure home financing, are commonly assumable. This allows new buyers to take advantage of existing loan terms if they meet the lender's credit and income requirements. FHA loans typically require at least a 500 credit score, but this usually requires a 10% down payment along with it. A score of 580 or higher requires less, typically 3.5% down.fha-loan-experianfha-loan-experian
VA loans
VA loans are assumable by both military and non-military buyers, making them accessible to a broader range of people. A key advantage of assuming a VA loan is the potential to inherit a lower interest rate from the original borrower, as these types of mortgages can come with more favorable terms. The Department of Veterans Affairs (VA) doesn’t have a specific minimum credit score, though lenders can set their own. You’ll find a score of “good or better” on the FICO® Score scale is usually required for a VA loan, meaning a 670 or greater.va-loan-requirements-experianva-loan-requirements-experian
USDA loans
United States Department of Agriculture (USDA) loans are generally assumable, especially when the property is transferred within the family. In these cases, the interest rate and loan term will stay the same, the new borrower will not need to meet lender requirements and the property usually doesn’t need to be appraised. Chase does not offer USDA loans at this time.
For non-arm’s length transactions, these loans can be assumed if the new buyer meets the lender’s criteria and the USDA’s guidelines. While the USDA doesn’t have a typical credit score requirement, most lenders will require a minimum credit score of 640 or better.usda-loan-experianusda-loan-experianusda-loan-experian
Conventional loans
Conventional mortgages, which are among the most popular home loans, typically include due-on-sale clauses requiring the loan to be paid in full when the property is sold. This generally prevents conventional loans from being assumed by a new buyer, with rare exceptions in cases like divorce or the death of the borrower.ownership-of-a-home-fannie-mae
Chase does offer FHA loans and VA loans which are assumable, and conventional loans, which can become assumable under certain conditions.
How does an assumable mortgage work?
The process of securing an assumable mortgage is similar to a traditional mortgage. Although, it will depend on lender requirements, the loan's complexity and how quickly the buyer can provide the necessary documentation. While taking over an existing loan means the interest rate remains the same, having a higher credit score can improve your chances of being approved for the assumption.
Given the potential for risk, it’s vital to plan ahead and maintain open communication with your lender throughout the entire assumable loan process. The steps to secure this type of mortgage typically include:
- Buyer qualification: The buyer must qualify for the assumable loan by undergoing the original lender’s underwriting process, which evaluates the buyer’s financial stability.
- Transfer of loan terms: If the lender approves the buyer, both parties must submit a formal application to the lender to initiate the transfer process.
- Equity payment: The buyer typically pays the seller the difference between the remaining mortgage balance and the current market value of the property. Instead of a traditional down payment, you'll pay the seller for the equity they’ve built in the home.
- Closing process: After the buyer has paid the seller, the lender will process the transfer, which may involve an appraisal, a title review and the payment of any additional fees (e.g., application fees, title fees, etc.)
- Monthly payments: After closing is complete, the buyer can now legally assume the loan and continue making monthly mortgage payments to the lender under the loan’s original terms.
Depending on the loan details and the equity the seller has, you might need a second mortgage to help cover costs. You could also use temporary financing, like a bridge loan, until you can secure longer-term funding.
The pros and cons of assuming a home loan
Overall, qualifying for an assumable mortgage requires careful attention to both your financial standing and the specific requirements of the original lender and loan type. You should also consider the pros and cons of this route to homeownership to determine if this type of loan fits your needs.
The pros
The benefits of an assumable mortgage include:
- Simplified homebuying process: Assuming a mortgage can help simplify the homebuying process by avoiding the need for a down payment or new loan approval. They often don’t require appraisals, either, which can save you time and money during the transaction.
- Lower closing costs: Assumable mortgages can help you avoid higher closing costs often associated with new loans since you're taking over an existing agreement.
- Lender flexibility: Lenders may be more willing to approve a loan assumption under favorable terms, especially if it helps to avoid foreclosure on the original loan.
The cons
There are several risks to consider when assuming a mortgage, such as:
- Market value fluctuations: If the property's market value is higher than the remaining loan balance, the buyer may need to make a significant upfront payment to cover the difference. They may also inherit a higher interest rate or a shorter repayment term.
- Potential for hidden costs: Additional costs—such as assumption fees, title fees and legal fees—may be associated with the mortgage, which must be paid before you can fully take over the loan.
- Credit impact: There’s a potential for the seller's credit to be impacted if the buyer misses payments, depending on the terms of the original loan agreement.
In summary
Assuming a mortgage can be a smart financial move, especially if you can secure a lower interest rate than current market rates. If the loan terms align with your financial goals and you meet the lender’s requirement, this option could offer significant benefits. However, it’s important to consider potential challenges, such as the need to cover the home’s equity and the risks of taking on someone else’s loan terms.
To help you make an informed decision, consult with one of our home lending experts. We can help you explore your financing options and provide the personalized guidance you need to secure a loan to fit your homebuying goals.
Chase does offer assumable home loan products, like FHA and VA loans. We also offer conventional loans, which, while not assumable upon origination, can become assumable under circumstances like death or divorce.ownership-of-a-home-fannie-mae