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What is an assumable mortgage?

How to assume a mortgage when buying a house

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What is an assumable mortgage?

Assumable mortgages allow you to buy a house by taking over ("assuming") the seller’s mortgage rather than getting a new mortgage to purchase the property.

You keep the seller’s interest rate, principal balance, repayment years, and other loan terms when you assume their mortgage and become responsible for paying it off.

The seller’s lender needs to approve your application, and you will want to understand the advantages and disadvantages of assuming the mortgage to decide if it is the right choice for you. Read on to learn more about assumable mortgages.

Why do homebuyers assume mortgages?

Homebuyers can be interested in assuming a mortgage when the rate on the existing loan is significantly lower than current rates. For example, if the seller has a 2.25% interest rate on their mortgage and current rates are 3.25%, it might make sense for you to assume the seller’s mortgage.

Homebuyers can also be interested in assuming a mortgage when the seller does not have much equity in their home. That’s because these purchases do not require a large down payment.

For example, pretend you want to buy a home for $275,000 by assuming a mortgage that has a principal balance of $250,000. This means you will only need to make a $25,000 down payment to buy the home.

If you want to buy a home for $275,000 by assuming a mortgage that has a principal balance of $150,000 however, you will need to make a $125,000 down payment or get a second mortgage.

How do assumable mortgages work?

You will need to complete an application, provide credit and financial documents, and get approved by the seller’s lender to assume a mortgage. You typically have to pay closing costs and you will likely need to sign a release of liability that makes clear the seller is no longer responsible for paying off the mortgage.

The lender may not require a new home appraisal when you assume a mortgage, which can save you time and the appraisal fee.

Can family members assume mortgages?

Yes. When a family member dies, it may be possible to assume their mortgage and become the owner of their house. When couples divorce and one of the partners is awarded ownership of a house, it may be possible for that partner to assume the mortgage.

What kinds of mortgages are assumable?

FHA loans, VA loans, and USDA loans are often assumable while conventional loans typically are not. Here are some important requirements to know:

  • Assumable FHA loans. If you want to assume an FHA mortgage, you will need to meet credit and financial requirements to get approved.
  • Assumable VA loans. You will need to meet credit and income requirements to assume a VA loan and pay a VA funding fee. You do not have to be a veteran to assume a VA loan.
  • Assumable USDA loans. USDA loans typically have income requirements you will need to meet as well as credit and other financial standards.

Buying a house with an assumable mortgage might make your home more attractive to a buyer when you decide to sell it. Do you have questions about mortgages? Call 877-220-5533 to speak to a Freedom Mortgage Loan Advisor or visit our Get Started page.

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