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Published: Dec 22, 2023 9 min read

Considering that mortgage rates are above 6%, taking over someone else's lower-rate loan can be a great way to save money on interest.

Assumable mortgages are the mechanism that allows you to do this: When you assume a mortgage, you’re basically picking up the previous owner’s loan, with the same interest rate and terms, when you buy their home.

It’s a fairly uncommon move, in large part because not all types of mortgages are eligible for assumption. Plus, it usually requires that the buyer come up with a lot of cash at the time of purchase to cover the amount of equity the seller has in the home.

Mortgage assumption can be complicated and it has its drawbacks, but the potential reward — a lower interest rate — can make it worth it.

Here’s what you need to know about assumable mortgages

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How does an assumable mortgage work?

Homebuyers tend to consider assuming mortgages when interest rates in the current market are higher than they were during a recent period. Those are the precise housing market conditions we’re in today, which has caused a surge of interest in assumable mortgages. According to American Banker, the volume of assumptions grew by 67% between 2022 and 2023.

Even with that growth, it’s still a niche product, because government-backed loans are generally the only mortgages eligible to be assumed. Fannie Mae and Freddie Mac loans — nearly two-thirds of the mortgage market — are usually ineligible.

The main draw of an assumable loan is the ability to secure a lower rate than you’d get with a new mortgage, which can lead to significant savings.

But assumable mortgages aren’t an option for many buyers because of the need for a large cash payment to the seller. (Buyers usually have to pay the seller the difference between the mortgage balance and the sale price of the home.) Other factors that can make it a nonstarter include a longer timeline to close, low numbers of government-backed mortgages in certain markets and the challenge of identifying them.

The general concept of how it works is fairly simple: Instead of taking out a new loan to buy a home, you assume the seller’s existing mortgage. You keep their interest rate, and the amount of time left on the mortgage loan doesn’t change.

Identifying an assumable mortgage

Some homebuyers zero in on the idea of taking over a mortgage and actively search for home listings in their area that could be candidates for loan assumption. This type of search could involve looking for listings that real estate agents are marketing as assumable mortgage or home listings by sellers with government-backed loans. (Most assumable loans are government-backed loans; more on that below.)

In other cases, a buyer may assume a mortgage from someone they know. Or, after deciding on a home to purchase, a buyer and their agent may realize that it’s a prime candidate for mortgage assumption and discuss the idea with the seller.

Creating an agreement between the buyer and seller

To compensate the seller for the equity they’ve built up in the home (ie. what they've already paid off with monthly payments and any appreciation in the property's value), you’ll likely have to make a large upfront payment for them to agree to sell their home this way.

Sellers sometimes use their assumable mortgages as a bargaining chip in the home sale process because they know it can save the buyer money on interest. That can make the home a better deal in the long run compared to other properties in the area.

That means that as the buyer you may have to assess whether it’s worth it to pay a higher price upfront for a lower interest rate.

Get approval for the transaction

The mortgage lender (and possibly also a branch of the government agency backing the home loan) usually needs to give approval for a buyer to assume a mortgage from a seller. In that case, there will be an underwriting process, which includes a credit and financial assessment of the new borrower that will consider things like your debt-to-income ratio.

The steps for approval depend on the type of government-back loan. For example, with VA loans, you’ll likely need to get approval from your regional VA loan center. These government approval processes can drag out the timeline of the transaction. (Note: The buyer does not need to meet all of the lender’s original eligibility criteria for new loans for the specific loan program in order to assume a mortgage. For example, you don’t need to be a veteran to assume a VA loan.)

Closing

Most of the normal steps of homebuying still apply when you assume a mortgage, which means you should expect to pay closing costs. That said, you may save some money here because you usually don’t need an appraisal with an assumable mortgage.

Once you finish the closing process, the new owner is liable for the mortgage and the seller is off the hook for those mortgage payments.

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Which types of loans are assumable?

Most government-backed loans are assumable.

The Federal Housing Administration, the U.S. Department of Agriculture and the Department of Veterans Affairs insure mortgages, making it easier for qualifying borrowers to access homeownership. While FHA loans, VA loans and USDA loans can all be assumed, the rules are a bit different for each. If you want to assume one of these loans, you should research the details for the specific program that applies to your transaction.

To assume a government-backed loan, there’s an application process and there are certain stipulations, like rules for the minimum amount of time the original borrower has owned the home before the mortgage can be transferred.

Conventional loans, which are originated and serviced by financial institutions like banks and credit unions, are usually not assumable. The main exception is a situation when a homeowner dies — their heir can often assume the mortgage with the same interest rate and repayment period.

In the case of a divorce, one spouse may be able to assume the mortgage in their name only, but it depends on the lender and the loan terms.

To figure out if a loan is assumable and under which circumstances, you can look at the fine print of your promissory note or contact your lender for information. If you're a buyer and you're unsure if a seller's mortgage is assumable, you could try to look at county records, or you could just ask the seller to check.

Pros and cons of assuming a mortgage

Here are some of the pros and cons of assuming a mortgage:

Pros
  • Secure a mortgage rate that’s lower than current market rates
  • For sellers, an assumable mortgage can help you attract buyers
  • No need for an appraisal
Cons
  • Longer timeline to close (need for lender approval)
  • Sellers may charge a higher purchase price
  • Need to compensate the seller for home equity with cash

How much does it cost to assume a mortgage?

The largest cost for assuming a mortgage is usually the payment you agree to make to the seller. This can be much higher than a normal down payment because you’re essentially compensating them for their equity in the home.

Other costs include closing costs, which typically total between 2% and 5% of the loan amount for a normal home purchase, according to Freddie Mac. With mortgage assumption, however, closing costs are often lower. That’s because closing costs for government-backed mortgages tend to be lower than with normal mortgages, mortgage assumption fees are relatively low and you may save money on title insurance. Also, an appraisal usually isn’t necessary so you can save a few hundred dollars there.

On the other hand, taking over a conventional loan could actually be more expensive than normal when you factor in the assumption fee, which is a percentage of the existing loan balance.

FAQs about assumable mortgages

Are all mortgages assumable?

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No, all mortgages are not assumable. Only government-insured mortgages are considered assumable. There are, however, certain situations when it may be possible to assume a conventional mortgage from a bank.

Can you assume a mortgage from a family member?

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Yes, you can assume a mortgage from family members, and this is one of the more common uses of assumable mortgages because people sometimes want to keep good, low-rate mortgages within the family.

Can you assume a mortgage after divorce or death?

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Yes, you may be able to assume a mortgage after divorce or death. The heir to a property can often assume a conventional mortgage and pick up paying the remaining principal balance. (The heir may need to satisfy requirements from the lender like a creditworthiness check and a review of your credit score.) Divorce scenarios are more complicated, so you should speak to your lender about your options.

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