What is an assumable mortgage?

Quick insights

• Assumable mortgages allow a homebuyer to take over a homeowner’s existing loan rather than open a new loan.
• Government-backed loans like FHA, VA and USDA can be assumable mortgages.
• Taking on an assumable mortgage may have financial benefits and specific challenges, such as limited availability and extra costs.

An assumption is a transaction in which the purchaser (or transferee) of real property takes over or is added to the existing mortgage loan; the seller (or transferor) remains liable for the mortgage loan unless released by the lender or servicer from this obligation. The terms indicating whether or not the mortgage loan is assumable is determined by the investor.

This article will describe the types of loans that can be assumed, the eligibility criteria and how it works in today’s market.

What home loans are assumable?

An assumable mortgage allows a buyer to take over the seller’s existing loan, including its terms and interest rate. However, not all home loans are assumable.

Types of assumable loans

• FHA loans: Commonly assumable with government approval, FHA loans are often favored by first-time homebuyers.
• VA loans: VA loans are assumable by qualified buyers, typically veterans or military personnel, but that’s not always a requirement.
• USDA loans: Can be assumed if the buyer meets specific eligibility criteria. The loan’s terms, including the interest rate, may change when assumed. (Chase does not offer this loan product.)

Are conventional loans assumable?

Typically, these loans are assumable in the case of marriage, death or divorce. Conventional loans are backed by lenders, not the government. Therefore, a new borrower must be qualified.

Availability in today’s market

Assumable mortgages are less common today because fewer lenders offer the option, and conventional mortgages usually cannot be assumed, except for the case of marriage, death or divorce. FHA and VA loans are more likely to be assumable but may be less common, so they’re less available in the real estate market.

How does an assumable mortgage work?

An assumable mortgage can be an attractive option when interest rates are high because it allows you to “inherit” a lower rate from the seller’s original loan. Here’s how the process generally works once the buyer and seller have started it:

1. Agreement: The buyer and seller agree that the buyer will assume the mortgage and provide an equity buyout agreement or purchase contract.
2. Eligibility check: The buyer confirms that the mortgage is assumable and meets lender criteria.
3. Application: The buyer submits an application to the lender, including financial details for approval.
4. Lender review: The lender assesses the buyer’s creditworthiness and eligibility.
5. Assumption agreement: If approved, the buyer and seller sign the assumption agreement, and the buyer takes on the loan.
6. Transfer of ownership: The mortgage is officially transferred to the buyer, and the seller is released from liability.

Assuming a mortgage after death or divorce

In these situations, an assumable mortgage can be a useful option; however, the process typically varies depending on the circumstances and loan type.

• After death: A mortgage isn’t automatically due if the homeowner passes away. Whoever inherits the property may be able to assume the mortgage, depending on the lender’s requirements. In these situations, it’s important for heirs or beneficiaries to contact the lender.
• After divorce: Shared property and debts, including a mortgage, are usually addressed in divorce settlements. If one party is awarded the home, they might assume the mortgage. They would have to qualify for the loan, potentially refinancing if it’s not assumable.

Roles and responsibilities of the parties involved

The buyer and seller have respective responsibilities within the assumable mortgage process, including:

Buyer:

• Assume the loan: The buyer takes over the mortgage balance and agrees to make future payments based on the original loan terms.
• Qualify for the loan: The buyer must meet the lender’s requirements, such as credit score, income and assets.
• Sign the assumption agreement: The buyer legally agrees to assume the mortgage and be bound by its terms.

Seller:

• Notify the lender: The seller must inform the lender that they intend to sell the home and allow the buyer to assume the mortgage.
• Provide documentation: The seller provides necessary documentation regarding the loan’s terms and balance.
• Release liability: Once the mortgage is assumed, the seller is generally no longer liable for the loan, depending on the terms. The seller’s liability can vary depending on the terms of the loan.

Lender:

• Approve the assumption: The lender must approve the buyer’s ability to assume the mortgage, based on their creditworthiness and other factors.
• Transfer the loan: After the loan closed, lender will process the assumption and update the loan records to reflect the new borrower.
• Legal oversight: The lender may have legal requirements for ensuring the assumption is properly documented and compliant with the loan agreement.

Timeline for a successful assumption

The process generally takes 60 to 90 days, depending on the lender and when exactly they approve the assumption. The preparation of these documents can also affect the timeline:

• The assumption application, including the buyer’s financial details.
• Loan agreement and property documents.
• An assumption agreement outlines the terms of the transfer. Once approved, the buyer signs the agreement, and the lender transfers the loan, finalizing the assumption.

Pros and cons of assumable mortgages

An assumable mortgage can offer advantages for both buyers and sellers, as well as certain risks and limitations. Here’s a breakdown of the pros and cons:

Pros of assumable mortgages

• Lower interest rates: Buyers can benefit from assuming a mortgage with a lower interest rate, potentially saving money over time.
• Fees: The fees to assume the loan are lower than the cost of new loan.
• Term: The buyer will assume the remaining term of the loan rather than originate a new loan at full term.
• Equity: Reduce principal balance while gaining equity position.
• Appraisal: No appraisal requirement on government loan.
• Simplified qualification: The buyer may find it easier to qualify for the mortgage, especially if the seller’s original loan terms are favorable.
• Seller flexibility: Sellers can transfer their mortgage to a buyer, making the process more attractive if they are moving quickly.
• Faster sale: Assuming a mortgage can streamline the home sale, reducing delays and attracting more potential buyers.

Cons of assumable mortgages

• Limited availability: Not all mortgages are assumable, especially conventional loans, which can limit options for buyers and sellers.
• Higher upfront costs: You might face additional fees, such as assumption fees, or the need to come up with a larger down payment.
• Complicated process: The assumption process can be complex and may require extensive paperwork, approvals and time.

How to qualify for an assumable mortgage loan

To qualify for an assumable mortgage, buyers must meet certain financial and credit requirements. The process is similar to a new loan: Buyer is evaluated based on credit history, income (in relation to stability, likelihood of continuance and sufficiency when compared to housing expenses and all other liabilities or obligations) and assets (liquid and semi-liquid as needed for funds to close and meet reserve requirements).

Eligibility criteria:

• Loan type: Government-backed loans (FHA, VA and USDA) are typically assumable; many conventional loans are not.
• Lender approval: The lender must approve the buyer based on their financial stability.

Financial and credit requirements:

• Credit score: Lenders typically require a minimum credit score, with government loans being more flexible.
• Income verification: Proof of stable income is needed to ensure the buyer can handle the mortgage.
• Debt-to-income ratio: Lenders assess your debt-to-income ratio (DTI), or how much debt you already have compared to your income.

Tips for approval:

• Improve credit: Pay down debts and maintain a good payment history to boost your credit score.
• Organize documents: Provide income and financial statements for a smoother approval process.

By ensuring solid credit and financial health, buyers can improve their chances of qualifying for an assumable mortgage.

In summary

An assumable mortgage can offer a unique opportunity for buyers and sellers alike. Assumable mortgages are more common with government-backed loans, as opposed to those offered by financial institutions and mortgage lenders. It can be helpful to evaluate if assuming a mortgage fits your financial situation and long-term goals. Carefully consider the pros, cons and your financial goals, or even work with a Home Lending Advisor, before moving forward.