As a prospective homebuyer, you may have heard tell of the days when mortgage rates were under 4.00%. Those are rates from what feels like a lifetime ago—though they existed just pre-2022.
If only there was a way to go back.
The closest thing to a mortgage time machine is called an “assumable mortgage.” With it, you just may be able to get that coveted sub-4.00% rate by taking over the mortgage of someone else. But there are some big caveats involved, including the potential need to take out a secondary loan.
Here’s what to know about an assumable mortgage.
What is an assumable mortgage?
An assumable mortgage allows the buyer of a home to inherit the seller’s existing mortgage instead of getting a new loan. Initiate one of these loans, and you’ll take over the seller’s loan balance, interest rate, and repayment term. In other words, the mortgage the seller opened perhaps five or 10 years ago is now your loan.
Assumable mortgages can bring many advantages that a more traditional mortgage cannot—for both the buyer and the seller. These include:
- As a buyer, you may be able to inherit an assumable mortgage with an interest rate far below the current market rates. Again, you may find mortgages from 3.00% to 4.00%, while the current average market rate breaches 6.00%. Even for a median-priced home, you’d likely save several hundred dollars per month on your payment.
- As a seller, you can list your property with a low interest rate and minimal closing costs. That can sharply improve the property’s marketability. It may even allow you to ask a little more for it.
How do assumable mortgages work?
Assumable mortgages sound like a dream, but there are some complications as well. Here’s how it works.
For example, you may find a property worth $300,000. Let’s assume for our hypothetical:
- The current owner still owes $200,000 on the original mortgage.
- The original mortgage rate is 4.00%.
- The current owner has 15 more years to pay off the loan.
In this scenario, you’d adopt the mortgage as-is. You’d owe $200,000 at a 4.00% rate and a 15-year term. You’d even probably save on closing costs, as the house won’t need to be appraised.
However, you’ll also owe whatever the owner charges beyond their outstanding mortgage balance. If they sell it for what it’s worth—$300,000—you’ll owe another $100,000 that you must pay directly to them. And if you don’t have the cash to swing it, you’re looking at a secondary loan to cover it all.
Here are the steps to expect when assuming a mortgage:
- Make sure you’re eligible. Look through the existing mortgage paperwork to identify for the assumable clause (your real estate agent should be able to help you with this).
- Get lender approval. It often takes between 45 and 90 days to be approved for an assumable mortgage, though the process can take up to 120 days. Either way, don’t count on getting approved as quickly as you likely would with a standard mortgage.
- Pay for closing costs and equity. You generally won’t have to pay some of the standard closing costs when assuming a mortgage, but you’ll still often pay various lender and government fees which can add up to similar out-of-pocket costs. And the equity built into the property will have to be paid, too.
- Take over payments. Once you sign the “promissory note” with the lender, you’ll officially take ownership of the house and begin making the same payments on the same mortgage as the previous owner.
Your biggest roadblock, once you’ve found a house on the market with an assumable mortgage, will very likely be the need to pay the current owner directly by cash or with an additional home loan.
Which mortgages are assumable?
Unfortunately, the majority of conventional loans are not assumable.
Private lenders typically bake a clause into a mortgage that allows the lender to demand full loan repayment immediately upon change of ownership—effectively ending the current loan. This “due-on-sale” clause protects the lender in case a mortgage is passed along to someone else that they may not find as creditworthy as the original borrower.
Here’s a rundown of the loans that do tend to be eligible for an assumable mortgage.
VA loans
Contrary to popular belief, you don’t actually need to have a military background or veteran status to assume a mortgage from the Department of Veterans Affairs. You only need to qualify for the lender’s existing terms. If approved, you can take advantage of the full suite of VA loan benefits, including a lower funding fee and no private mortgage insurance.
There are a few big caveats to assuming a VA loan specifically:
- Not all VA lenders will approve non-veteran applicants.
- Assuming a VA loan is known to be a lengthy process. In some cases, the VA office itself must approve each application, which can take months.
- Even though VA loans are assumable, sellers may be reluctant to give up their loan as they could lose their VA entitlement. It can be difficult for them to get another VA loan if you don’t qualify for a VA loan yourself.
USDA loans
Unlike a VA loan, only those eligible for a USDA loan in the first place can assume a USDA loan. That means your FICO Score will generally need to be around 640, your household income must be below 115% the median for the area, and more. The same terms and rate may remain when assuming a family member’s loan, but in other scenarios, you’ll likely have to assume the existing debt with new terms and rates.
FHA loans
Per the U.S. Department of Housing and Urban Development (HUD) itself, all FHA insured mortgages are assumable. But, you’ll need to meet the lender’s FHA loan requirements.
Pros and cons of assumable mortgages
Pros
- Potentially lower interest rate
- No appraisal necessary
- Appealing listing for the seller
Cons
- You must buy the seller’s equity as well as their remaining mortgage with cash or secondary financing
- Potentially longer closing time than a standard mortgage
- Most loans are not assumable, making them a comparative rarity
When does assuming a mortgage make sense?
As you can tell, assuming a mortgage isn’t for everyone. Here are some questions to ask yourself before jumping to hunt for an assumable mortgage:
- Do you qualify? Again, you’ll have to qualify for a USDA loan if you want to assume that type of loan. An FHA or VA loan shouldn’t be a problem as long as you’ve got a willing seller, a credit score in the mid-600s, and a reasonable debt-to-income ratio. Of course, nothing is guaranteed until the lender stamps the approval.
- Is the existing rate far lower than the current mortgage rate? An assumable mortgage only makes sense if you’re going to save money. Receiving a loan for 4.00% when you’d otherwise qualify for, say, 7.00%, is an incredible opportunity. Depending on how much is left on the loan, you could potentially save many tens of thousands of dollars over the remaining lifetime of your loan.
- Can you afford to buy the current owner’s equity? The more equity the home has, the more money you’ll have to front to buy it. Remember, you’re only assuming their mortgage—you’ll have to pay for the remaining property value some other way.
The takeaway
Assumable mortgages are a luxury for those that can find a willing seller and an eligible loan with a low rate, plus pony up for a home’s current equity.
Still, there are a few big reasons why they aren’t more common. For example, they only apply to federally backed home loans, not the common conventional mortgage—and you could owe the seller potentially six figures in cash at closing to cover their existing equity.
But if you’re looking for a government-backed home loan with a rate at or around 4% and have ample cash to close, an assumable mortgage can make sense to pursue.
Frequently asked questions
Which types of mortgages are assumable and which are not?
Government-backed loans such as FHA, VA, and USDA loans are assumable. Traditional mortgages from private lenders without government backing are not.
Is an assumable mortgage always a better deal when rates are high?
Government-backed loans such as FHA, VA, and USDA loans are assumable. Traditional mortgages from private lenders without government backing are not.
Is an assumable mortgage always a better deal when rates are high?
When rates are high, an assumable mortgage can often be a better deal as it often has lower rates. Still, if you’re forced to take out a substantial secondary loan to pay the equity portion of your home, it could be a considerably worse deal.
How do you find homes for sale with assumable mortgages?
Some real estate sites, such as Realtor.com, may offer a filter to search by assumable mortgages.
What credit score do you need to assume a FHA, VA, or USDA mortgage?
A good rule of thumb is to have a credit score at or above 640 to assume a mortgage. However, it can be possible to be approved with a lower score.
Can you negotiate the purchase price when assuming a mortgage?
You can always try to negotiate a price with the seller. Any decrease in cost will lower the amount of equity you owe them at closing.
