What is an Assumable Mortgage? Definition and Examples

Have you ever bought a house and taken over the seller’s existing mortgage? If so, you Assumed their mortgage—this is known as an Assumable Mortgage.

Assumable mortgages are an attractive financing option if you are looking to secure lower interest rates and avoid some of the expenses involved in taking out a new mortgage.

In this article, we will break down what an assumable mortgage is, how it works, its pros and cons for both buyers and sellers, and the key considerations you should bear in mind before assuming or offering an assumable mortgage.

What Is an Assumable Mortgage?

An assumable mortgage allows a homebuyer to take over a seller’s existing mortgage, including its terms and balance.

In essence, as mentioned earlier, the buyer “assumes” the loan, keeping the interest rate, payment schedule, and balance intact.

The only significant change is the new borrower’s name being added to the loan documentation. This can be particularly advantageous when current interest rates are significantly higher than the rate on the existing mortgage.

For example, imagine a seller obtained a 30-year mortgage in 2021 with a low 3% interest rate. By assuming that mortgage in 2024, a buyer could avoid paying the higher 6% or 7% rates on new loans, potentially saving thousands of dollars over the life of the loan.

In an article published by CNN, Sandy John, Katie Lowery, and Andrew Pentis wrote, “An assumable mortgage allows a homebuyer to take over an existing (typically government-backed) home loan from a seller, assuming the established interest rate, remaining loan term and principal balance. Think of it like a relay race — the seller passes you the mortgage baton, and you carry the loan toward the finish line.”

A house seller shaking hand with the buyer and a written definition of the term assumable mortgage.
Assumable mortgages are most commonly available for government-backed loans, such as FHA, VA, and USDA loans.

More Common in the United States

Assumable mortgages do exist outside the United States, but they are less common and vary by country:

  • Canada

Assumable mortgages are available but require lender approval and are less common than in the U.S.

  • United Kingdom

In the UK they are rare, as most UK mortgages include “due-on-sale” clauses that require full repayment upon sale.

  • Australia

Uncommon, with most mortgages also including “due-on-sale” clauses. Assumptions may be allowed under specific conditions.

  • European Union

Practices vary by country, but assumable mortgages are generally less common, and new buyers typically need to secure a new loan.

  • Other Countries

In regions like Asia and Latin America, assumable mortgages are uncommon, and mortgage transfer rules are often restrictive.

Overall, assumable mortgages exist but are much more limited outside the U.S., where they are mostly tied to government-backed loans like FHA, VA, and USDA mortgages.

How Does an Assumable Mortgage Work?

The process of assuming a mortgage begins when a buyer takes over a seller’s existing mortgage.

The terms of the loan, including the interest rate, principal balance, and the remaining loan term, stay the same.

The new borrower must go through the same lender approval process as they would with a new mortgage, including a review of their credit score, debt-to-income ratio, and income verification.

If you assume a loan, you take on responsibility for the remaining loan balance, but must typically pay the seller for their equity in the home.

If the property’s current value exceeds the remaining balance on the mortgage, you would need to cover the difference, either in cash or by obtaining a second mortgage. This can significantly increase the upfront costs.

Which Loans Are Assumable?

It is important to note that in the US, assumable mortgages are usually limited to government-backed loans such as

  • FHA Loans

These loans are insured by the Federal Housing Administration. The US Department of Housing and Urban Development (HUD) says that FHA loans have been helping Americans since 1934.

FHA loans are assumable by anyone who meets the FHA’s credit and underwriting criteria. However, buyers must pay FHA mortgage insurance premiums.

  • VA Home Loans

According to the US Department of Veterans Affairs, “VA Home Loans are provided by private lenders, such as banks and mortgage companies. VA guarantees a portion of the loan, enabling the lender to provide you with more favorable terms.”

VA loans can be assumed by non-veterans, though sellers may need to relinquish their VA entitlement, which limits their ability to obtain another VA loan in the future. Additionally, a processing fee and a funding fee are required for VA loan assumptions.

  • USDA Loans

These loans are offered by the U.S. Department of Agriculture. USDA loans can be assumable, but in most cases, the rate and terms may be reset, which could reduce the advantages of assuming the loan.

Conventional mortgages generally are not assumable unless they lack a “due-on-sale” clause or are being transferred due to special circumstances such as death or divorce.

Pros of Assumable Mortgages

For buyers, assumable mortgages can offer several benefits:

  • Lower Interest Rates

The most significant advantage of assuming a mortgage is securing a lower interest rate, particularly in high-rate environments. If the seller locked in a low rate years ago, the buyer can avoid higher market rates.

  • Lower Closing Costs

Assumable mortgages can lead to lower closing costs because lenders typically do not require an appraisal, and government-backed loans may limit certain fees.

  • Increased Buyer Demand

From a seller’s perspective, having an assumable mortgage can make a property more attractive, especially when interest rates are high.

Buyers may be willing to offer a higher purchase price if they can take over a favorable loan.

Clipboard and pen plus a list of pros and cons regarding assumable mortgages.
Weighing the pros and cons will help you determine whether this type of loan is for you.

Cons of Assumable Mortgages

While assumable mortgages present many benefits, there are also downsides to consider:

  • Large Down Payment

Because the assumable loan typically doesn’t cover the full purchase price of the home, you (the buyer) will need to make a substantial down payment or take out a second loan to cover the seller’s equity.

This can make it difficult if you are a first-time buyers or have limited savings to take advantage of assumable loans.

  • Limited Availability

The majority of home loans are not assumable, which limits the pool of properties a buyer can consider.

This is particularly true for conventional loans, which generally include “due-on-sale” clauses that require the loan to be paid off when the property is sold.

  • Second Mortgage Costs

If you need to take out a second mortgage to cover the seller’s equity, you may end up with a higher rate on the second loan.

The additional costs associated with a second loan, such as higher interest rates and extra closing fees, can offset some of the savings you gained from the assumable loan.

How to Assume a Mortgage

If you’re considering assuming a mortgage, here are the steps you should follow:

  • Find a Home with an Assumable Loan

Work with a real estate agent to find listings that mention assumable loans or consult online listing platforms to identify homes with FHA, VA, or USDA loans.

  • Contact the Lender

Before you get too far in the process, confirm with the seller’s lender that the loan is assumable and what their specific requirements are for assuming the mortgage.

  • Prepare Financial Documentation

Like applying for a new mortgage, you will need to provide financial information such as proof of income, credit reports, and tax returns.

  • Cover the Seller’s Equity

Ensure you have the funds or financing lined up to cover the seller’s equity in the home. You may need a large cash sum or a second loan to bridge the gap between the remaining loan balance and the home’s sale price.

For example, if the house is selling for $250,000 and the assumable mortgage has a balance of $170,000, you would need to provide a down payment of $80,000 to cover the difference.

  • Complete the Assumption Process

Submit your application to the lender and wait for approval. Once approved, you will proceed to closing, where you will sign the necessary documents and pay any required fees.

Take a Step Back

Two people looking up, wondering about their assumable mortgage.
Take a moment to reflect before committing. Make sure you thoroughly understand all the details of your loan agreement.

Before you move forward with the loan assumption, give yourself a little time for reflection. Ask yourself the following questions:

  • Is the assumed mortgage’s interest rate significantly lower than current rates?
  • Do I have sufficient funds or financing in place to cover the seller’s equity?
  • Am I comfortable with the monthly payments and loan terms for the remaining duration of the mortgage?
  • Will I need to take out a second mortgage, and can I afford the additional costs?
  • Have I considered the closing costs, processing fees, and any potential funding fees that come with assuming this mortgage?
  • What will my total financial commitment be, including both the assumed mortgage and any other loans I need to take out?
  • How will assuming this mortgage affect my long-term financial plans and savings goals?
  • Is the home worth the price, considering the amount I’ll need to pay for the seller’s equity?
  • Am I prepared for possible changes in my financial situation, such as job loss or unexpected expenses?
  • Can I repay the loan early if my financial situation improves, and are there any prepayment penalties?

Final Thoughts

An assumable mortgage can be a great opportunity to secure a low interest rate and reduce mortgage payments, especially in a high-rate market.

However, you need to be prepared for significant upfront costs and a potentially complex approval process.

Sellers with assumable loans can use this as a selling point to attract more buyers, but they should also consider the impact on their ability to obtain future financing, particularly with VA loans.

Before pursuing an assumable mortgage, both buyers and sellers should weigh the pros and cons carefully and seek advice from real estate professionals or financial advisors to ensure it’s the right option for their financial situation.