What is an assumable mortgage and how does it work?

Imagine you’re shopping for a new home and find one that lets you “assume” the seller’s existing mortgage. This can save you the trouble of applying for a new loan and may even help you secure a lower interest rate. However, it can also come with downsides, and you or the property may not even qualify for an assumable mortgage. Read on to learn more about this creative financing solution and whether it’s right for you.

What home loans are assumable?

Most conventional mortgages – those not backed by a government agency – are not assumable. However, there are a few exceptions, such as when a “successor in interest” assumes a conventional mortgage. This is when an owner transfers property to a family member or beneficiary, often after a death, divorce, or other life change. In addition, most adjustable-rate mortgages (ARMs) may be assumed after their initial fixed period.

Mortgages that generally can be assumed include those backed by the Federal Housing Administration (FHA), the Department of Veterans Affairs (VA), or the United States Department of Agriculture (USDA) – as long as certain criteria are met. For example, FHA and VA loan assumptions must usually be approved by the seller’s lender.

How to assume an FHA loan

To assume an FHA loan, the seller must have lived in the home for at least 1 year, and you must adhere to the standard FHA loan borrowing requirements. Among other things, these include making a down payment of at least 3.5% and having a minimum credit score of 580 (although some lenders may accept lower scores if you make a 10% down payment).¹

Assuming a VA mortgage

VA loans offer 0% down payment home financing to qualifying active-duty service members, veterans, members of the National Guard and Army Reserve, and surviving spouses. However, even if you aren’t one of the above, you may still be able to assume a VA loan if the seller is willing to give up their VA entitlement, the amount the VA will guarantee on a (future) mortgage.

In addition, VA loan assumptions must be approved by the loan servicer and sometimes the VA itself, leading to more paperwork and longer approval timelines.

At times, you may encounter a freely assumable VA loan from a seller who closed on their home before March 1, 1988. Sellers with loans closed before this date don’t need to receive lender approval. However, if the buyer fails to make payments, the seller could be liable, which is why it’s smart for sellers to get a liability release from the VA first.

Assuming a USDA mortgage

Though not currently offered by Rocket Mortgage, USDA loans can also be assumed. However, when USDA funding is limited, you may assume the outstanding debt but receive new loan rates and terms. Assuming the USDA loan’s original terms and rates is only possible for successors in interest (discussed earlier).

How does an assumable mortgage work?

An assumable mortgage lets you take on the seller’s existing mortgage instead of getting a new one. However, you must get the approval of the seller’s lender. Without it, the seller may be required to pay the full balance of their mortgage upon sale. Even if they have you take over their loan payments without officially assuming the loan (aka a “subject-to” deal), they run the risk that you’ll miss payments, hurting their (and your) credit score. A properly assumed mortgage transfers legal liability for the loan from the seller to you.

At the same time, assumable mortgages usually don’t require an appraisal, which can save you some time and money in the borrowing process. However, it’s important to still order a home inspection to ensure you detect any potential structural hazards or other issues with the house.

Pros and cons of assumable mortgages

Of course, assuming a mortgage has its benefits and drawbacks. Consider the following:

Pros

• Allows for a faster sale: Sellers offering an assumable mortgage option may attract more prospective buyers who are looking for a potentially lower interest rate.
• Buyers may save money: Buyers may be able to receive a lower interest rate when they assume a mortgage. They may also be able to forgo the cost of an appraisal.
• The VA, FHA, and USDA may limit closing costs when a buyer assumes a mortgage: This can lead to additional savings.

Cons

• Higher down payment: Since the seller likely has some equity, their loan balance won’t be enough to cover the home purchase, forcing you to make a (large) down payment.
• No cost comparisons with other lenders: When assuming a mortgage, the buyer agrees to the interest rate and terms of the seller’s loan. This means that they cannot shop around for lower rates or better terms.
• A potential for a denial to assume the loan: The buyer must meet certain criteria and requirements from the lender and any investors in the mortgage. For example, FHA loans require that buyers and sellers satisfy specific FHA criteria.

How to qualify for an assumable mortgage loan

To qualify for an assumable mortgage, follow these steps:

1. Find a property you like and verify that its mortgage is assumable.
2. Assess your credit report and score, ensuring they meet the lender’s criteria for assuming the loan. In addition, know your debt-to-income ratio (DTI), as this can impact whether you can assume a mortgage.
3. Gather and complete all documentation for the loan, including the application, income verification, employment verification, asset verification for a down payment, etc.
4. Submit the application for assuming the mortgage.
5. Complete all additional paperwork requested by the lender and pay any necessary closing costs.

How much does it cost to assume a mortgage?

The cost to assume a mortgage varies by lender and any investors in the mortgage. However, assumption fees are typically a percentage of the unpaid loan principal or a flat fee.

Keep in mind that state laws may also regulate assumption fees, so carefully research the laws and guidelines in your state.

If assuming a VA loan, you must pay a VA funding fee. This is 0.5% of the remaining mortgage balance, with exemptions for those who are:

• Receiving VA disability payments.
• A surviving spouse, receiving Dependency and Indemnity Compensation (DIC) benefits.
• An active-duty military member who returned to duty after receiving a Purple Heart.

Assuming a mortgage after divorce or death

You may be able to assume the mortgage of a recently deceased family member or former spouse from whom you were recently divorced. However, you must still meet the lender’s minimum borrowing requirements. They’ll assess your income statements, asset lists, and creditworthiness, ensuring that you can afford the loan payments.

The bottom line: Weigh the pros and cons of mortgage assumption

Assumable mortgages can offer compelling advantages, particularly when interest rates are high, but they’re not for everyone. Both buyers and sellers should carefully evaluate whether this option aligns with their financial goals and situation.

Remember that while FHA, VA, and USDA loans are generally assumable with lender approval, most conventional mortgages cannot be assumed unless you’re a successor in interest or assuming an ARM after its initial fixed period.

If you’re considering an assumable mortgage or want to explore other financing options, we can help. Start your Rocket Mortgage application today to discover what’s possible for your next home purchase.

¹To qualify for this offer, you must meet all standard FHA eligibility requirements. In addition, your total mortgage payment, including taxes and insurance, cannot exceed 38% of your income, your debt-to-income (DTI) ratio cannot exceed 45%, and you must have 12 months of verifiable housing history immediately prior to your application, no late payments 30 days or greater in the last 12-months, and no derogatory marks on your credit report. Not available on jumbo loans. Asset statements may be needed, no more than 1 day of non-sufficient fund fees are allowed in the most recent 2 months prior to application. Additional restrictions/conditions may apply.

Rocket Mortgage is a VA-approved lender, not endorsed or sponsored by the Dept. of Veterans Affairs or any government agency.

Rocket Mortgage is not acting on behalf of FHA or HUD.