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How To Assume a Mortgage

tl;dr

What You Need To Know

  • An assumable mortgage transfers the loan to the new homeowner
  • It can be a great deal for both the buyer and the seller in terms of cost
  • Standard qualifications still apply by loan type

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The home buying process can be long and challenging, but an assumable mortgage could make things faster and easier for both the buyer and the seller. Mortgage assumption gives sellers an edge while saving buyers on interest and closing costs. It’s not right for everyone, but it could make closing on a home shorter than a TikTok (jk)!

You should take your time to decide if assuming a mortgage would be a smart money move for you. Our comprehensive guide is a good place to start. We explain the pros and cons of an assumable mortgage so you can determine what’s right for you.

What Is an Assumable Mortgage?

An assumable mortgage allows the buyer to buy the seller’s home by “assuming” (aka taking over) the seller’s mortgage. When you assume a seller’s mortgage, you’re assuming all of their monthly payments and liability.

Assumable loans are often involved in divorce cases where the spouse keeping the home doesn’t have their name on the loan. You might also find yourself dealing with an assumable mortgage if a deceased relative leaves you a home.

How Does Mortgage Assumption Work?

While it might sound easy, it takes work to complete a mortgage assumption. Everyone involved must qualify, and the loan must be approved as assumable. 

There are cases when the property qualifies but the new borrower doesn’t, and this needs to be addressed.

Here are the steps involved with the mortgage assumption process:

  1. Find out if the loan is assumable: Not all loans are assumable. Make sure the property and buyer qualify. This should be done before talking to the lender.
  2. Send an assumption request to the lender: The lender makes the final decision. If you don’t get their prior approval, you’ll risk having the sale fall through.
  3. Submit any financial info requested by the lender: A lender will do a thorough review of your finances. You’ll need to provide at least 2 years of proof of employment and financial information, including any investment accounts, loans and bank account information. You’ll also need to provide financial paperwork to back up your credit history, income and debt-to-income (DTI) ratio. Any current mortgage payments will also factor into the lender’s decision.
  4. Sign the assumption agreement (aka the modified deed): When the lender agrees to the loan assumption, they will issue a modified deed for the buyer to sign. Pay attention to any special conditions, like a down payment or mortgage insurance.

Got everything so far? Great! Let’s dig deeper into step one.

Which Mortgage Loans Are Assumable?

Not all loans are alike. Some loans are not assumable. In fact, any conventional mortgage with a due-on-sale clause is prohibited from loan assumption.

Also, assuming a loan through divorce or death isn’t guaranteed either. Lenders will require that you meet the minimum qualifications for the property. For example, both spouses may have qualified for a mortgage together, but one partner may not be able to do it on their own. 

Talk to the lender and ask if an assumable mortgage is possible. The lender underwrote and serviced the original mortgage and will do the same for the new loan, so everything rests on the decisions of the lender. 

Here’s what you need to know before starting the loan assumption process:

Conventional mortgages

A 30-year conventional mortgage (think: loans backed by Freddie Mac and Fannie Mae) is rarely assumable because private lenders often require a due-on-sale clause. (Private lenders started requiring these clauses in the 1970s.)

The seller may try a simple assumption. That’s a scenario where the buyer takes over the mortgage payments but takes on no other liability. A full assumption, also called a novation, can’t happen if a mortgage has a due-on-sale clause.

Make sure you discuss all options with the lender before starting the assumption process on the original mortgage.

USDA loans

USDA loans are government-backed loans that are assumable with the approval of the U.S. Department of Agriculture. It’s one of the lesser-known mortgage assistance programs, but it shouldn’t be overlooked because it offers guaranteed loans, which helps borrowers secure loans with no money down.

These loans cover rural properties and no down payment is required. USDA qualifications must be met, including[1]:

  • A minimum credit score (the USDA doesn’t have a credit score requirement, but lenders may have their own requirement) 
  • Debt-to-income (DTI) ratio below 30% of housing expenses and 42% of total expenses
  • Household income that is 115% of the median area income or lower

FHA loans

FHA loans, like other government-backed loans, are assumable. The Federal Housing Administration insures these loans to provide lower closing costs and lower down payment requirements (3.5% – 10%, depending on the borrower’s credit score) than a conventional mortgage.

FHA underwriting requirements must be met, including[2]:

  • Minimum credit score 580 or higher
  • Debt-to-income (DTI) ratio below 32% of housing expenses and 42% of total monthly expenses

VA loans

VA loans are assumable, government-backed loans granted to qualifying service members, veterans and their surviving spouses. 

They come with great money-saving benefits, like financing with no down payment and no private mortgage insurance (PMI).

When Does It Make Sense for a Seller to Transfer a Mortgage?

Transferring a mortgage gives the seller an edge when the loan has a lower interest rate than the going market rate. This could make the sale an easier process than usual, and the property could go for a higher selling price because of the lower interest rate.

Other reasons a seller may choose to transfer the mortgage include:

  • More price negotiation power
  • Lower selling closing costs
  • Major life events that force a property transfer (like divorce, inheritance, estate planning and gifts of real estate)

Of course, just because it works for these situations doesn’t mean that an assumable mortgage is an end-all solution. There are points to consider before selling your home.

What sellers need to know about assumable mortgages and their disadvantages

Assumable mortgages on USDA and FHA loans don’t usually present any challenges – but there’s a hitch for VA sellers.

Service members often get deployed during their mortgage terms, so they’re given maximum protection during the mortgage process. The VA guarantees (aka promises) that it will repay part of the principal balance if the service member defaults. This is what’s known as an entitlement, and a mortgage could take up the entire thing. The VA provides up to four times the basic entitlement of $36,000.

If the seller transfers their VA-backed loan to a civilian borrower, their entitlement will transfer to the borrower.

If that happens, the seller may not qualify for another entitlement. And, when the seller tries to buy another home, they may find that they’ve exhausted their benefit and will have to get a conventional loan. 

To avoid losing their entitlement, the seller has to transfer the loan to another service member or veteran. When the borrower is a qualified service member or veteran, they have their own entitlement, which means the seller’s entitlement would reset and could be used on another property.

Why Would a Buyer Want to Assume a Mortgage?

We’ve covered the seller, but the buyer benefits from assuming a mortgage, too. Rates hit rock bottom during the COVID-19 pandemic, and they’re only going to go up from here. That means buyers might secure a lower interest rate through an assumable mortgage.

Besides getting a below-market interest rate, consider closing costs. Closing costs typically total in the thousands of dollars on a normal real estate transaction. 

The FHA, USDA and VA limit assumption-related costs. This makes a loan assumption more attractive and affordable overall – but there are disadvantages, too.

What buyers need to know about assumable mortgages and their disadvantages

With an assumable mortgage, the seller likely paid down the original mortgage while the home’s value went up. That obviously leaves a gap between the home’s value and the mortgage principal – and the buyer must pay that difference upfront. 

If the house is sold for $300,000 and the mortgage is $180,000, the buyer would need to fork over a cool $120,000 to the seller to cover the difference. No biggie, right … 

If you inherited the house from someone, this money gap wouldn’t be a problem because you’d inherit the paid balance.

FHA loans may have private mortgage insurance (PMI). That could add unexpected costs. Monthly PMI payments might negate the savings you get from scoring a lower interest rate.

If you’ve taken everything under consideration and you’re ready to move ahead with a mortgage assumption, here’s how you make the process go as smoothly as possible.

Want a Smooth Mortgage Assumption Process? Here Are 2 Tips

Both the buyer and seller can take steps to make mortgage assumption seamless. 

  1. For the seller: Be sure to get the lender’s sign-off on the assumption as soon as the lender determines that the loan qualifies for assumption. The lender has the final say on the assumption, and this protects you from going through a process that falls through and leaves you liable.
  2. For the buyer: Perform an appraisal and title search. This is a vital step before buying any home. The appraisal will tell you the value of the real estate you’re getting, and the title search will uncover any liens that may exist against the property.

Make the Mortgage Move That’s Best for Your Life 

Buying a house is a life-changing event, and it will likely be the biggest purchase you ever make. A mortgage assumption can make it much easier to buy a home, so don’t underestimate its value.

Although a mortgage assumption can make life easier for both the buyer and the seller, each party must meet minimum qualifications. Make sure your i’s are dotted and your t’s are crossed so you can get the best possible outcome.

  1. USDA Rural Development. “Single Family Home Loan Guarantees – What does this program do?” Retrieved October 2021 from https://www.rd.usda.gov/sites/default/files/fact-sheet/508_RD_FS_RHS_SFHGLP.pdf

  2. U.S. Department of Housing and Urban Development. “Section C. Borrower Credit Analysis Overview.” Retrieved October 2021 from https://www.hud.gov/sites/documents/4155-1_4_SECC.PDF

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In Case You Missed It

Take-aways

  1. A mortgage assumption transfers debt from one party to another
  2. It benefits both sides, but the buyer and the seller must meet specific requirements
  3. Vigilance with financial documentation makes the process easier

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