Finding the right type of loan can save homebuyers thousands over time, which is why shopping around for the best rate is so important.
As mortgage interest rates continue to hover just under 7%, some potential buyers are eager to lock in and get approved for a mortgage that will meet their budget over the life of the loan.
However, for others, alternative loans may be the way to go in the form of an assumable mortgage. It’s an often overlooked type of home financing arrangement that may be an option for certain buyers.
“Assumable mortgages, while offering potential advantages like lower interest rates, are not widely known or utilized for a number of reasons,” Michael Brennan, president at Nationwide Mortgage Bankers, tells Realtor.com®. “These include the limited availability of assumable loans (primarily government-backed), the complexities of the assumption process, and the potential for higher upfront costs.”
An assumable mortgage allows a homebuyer to take over the seller’s existing mortgage—along with its terms, including the interest rate. In many cases, that rate is lower than what’s currently available on the market.
Additionally, in doing so, the buyer “assumes” the previous owner’s remaining debt. The buyer can potentially avoid obtaining their own mortgage—which may have a higher interest rate than the one they are “assuming.”
“Sellers often benefit from faster sales and a better final sales price,” Shaun Michael Lewis, CEO of Clearwater Properties, tells Realtor.com. “In our markets, listings with assumable loans at very favorable mortgage rates usually receive multiple offers soon after the listing goes live. Sellers can sometimes command a premium because there is a huge benefit to selling a property that is coupled with an interest rate that is far below market.”
There are different types of loans which can qualify for an assumable mortgage, but most conventional loans are not assumable.
Loans that qualify as assumable mortgages
Buyers who want to assume, or take over, a mortgage from a seller must meet the requirements and receive approval from the agency backing the loan. Most government-backed loans are assumable.
The most popular types of assumable loans are the Federal Housing Authority (FHA), U.S. Department of Agriculture (USDA), and Veterans Affairs (VA).
With FHA loans, the seller’s lender will verify if the buyer meets the qualifications, including having good credit. Keep in mind, there are fees associated with transferring the loan. Those fees are capped at $500. FHA loans also come with mortgage insurance. Borrowers are responsible for those premiums.
There are two ways to assume a USDA loan: with new rates and terms, or with the original ones. In both cases, the buyer must meet credit and income requirements and receive USDA approval to transfer the title.
Most USDA loans, though, involve new rates and terms. However, if the seller has been delinquent on payments, the mortgage cannot be assumed.
VA loans are also assumable but carry additional requirements depending on when the loan originated. Loans approved before March 1, 1988 are “freely assumable,” according to LendingTree. This means a lender doesn’t have to approve the assumption. Loans approved after March 1, 1988, are assumable as long as the lender approves and the buyer meets the credit requirements and pays the processing fee.
“Not all sellers are even aware that their mortgages are assumable,” explains Lewis. “I would definitely recommend that buyers who are interested in possibly assuming a mortgage work with an agent who has some experience with them, as the transaction will be more complex than normal if an assumption is involved.”
How it works
Homeowners who took out a mortgage to finance their property may be able to transfer that loan to a buyer. The new buyer would assume the remaining principal balance, interest rate, repayment schedule, and all other original terms of the mortgage.
If current interest rates are higher than what was locked in with the original mortgage—this is where the cost-saving advantage comes into play. If the assumable mortgage has a lower, fixed interest rate, the buyer taking over the terms of the loan will not be affected by rising interest rates.
“If you lock in a rate from two or three years ago, you could save tens of thousands over the life of the loan,” explains Brennan. “That means more cash flow to invest in income-producing assets. But do not just look at the rate. Look at total costs, fees, and whether taking over that loan actually fits your bigger wealth plan.”
Buyer beware
The final decision to approve an assumable mortgage doesn’t rest with the buyer or seller—it lies with the original mortgage lender.
But buyers who will take responsibility for the loan need to make sure they look at the home equity the seller has built.
For instance, if the seller has a $200,000 loan balance on a $325,000 home, the buyer will need to compensate $125,000 to the seller for the equity they’ve built. This amount may be far higher than the down payment funds a borrower originally budgeted.
“You could be stepping into hidden problems: unpaid property taxes, needed repairs that drain your wallet, or adjustable rates that suddenly jump,” adds Brennan. “It is like buying a used car with no inspection. You must dig into the paperwork, run the title checks, and stress test your budget so one surprise does not wreck your plan.”
How do you know if a property has an assumable mortgage
Homes with assumable mortgages aren’t typically advertised, but according to LendingTree, buyers can ask title companies, real estate agents, or look for distressed properties, where sellers may be more open to this option to avoid foreclosure.
“It is a great way to make their listing or property stand out in a competitive market as well as when their loan to resale value has a narrow margin which would make a traditional sale very difficult,” Yancy Forsythe, founder of Missouri Valley Homes, tells Realtor.com. “Better yet, work with an agent who actually understands how the process works and let them work on your behalf to find the best opportunity out there for you.”
It’s also suggested to search the mortgage contract for an assumable clause that explains the status of the mortgage.