Assumable mortgages: taking over a seller's loan and its rate

How an assumable mortgage works

In an assumption, the buyer takes over the seller's mortgage with the servicer's approval and keeps its rate, balance and remaining term. The loan is not paid off; it changes hands. The buyer then pays the seller the difference between the price and the balance.

• FHA: assumable once the servicer approves the buyer's credit
• VA: assumable with approval; 0.5% funding fee applies
• USDA: assumable, but only with the servicer's approval
• Conventional: usually not assumable, because of a due-on-sale clause

Conventional loans usually carry a due-on-sale clause, and federal law (12 U.S.C. 1701j-3, the Garn-St Germain Act) lets lenders enforce it. The Act exempts a few transfers, including to a spouse or children, after a borrower's death and in a divorce.

How big the equity gap gets

The gap is the sale price minus the balance you take over, so each extra dollar of price adds a dollar to it. A new loan's down payment grows by only 3.5% of that dollar.

At $400,000 the gap is more than eight times a new loan's down payment. You need that cash, a second mortgage for part of it, or a different home. The older the low rate, the more equity the seller has usually built.

From offer to closing

1. Confirm the seller's loan is assumable and get the servicer's assumption package
2. Submit income, credit and asset documents for the servicer's review
3. Allow time for approval, which can run longer than a new loan
4. Fund the gap, close any second loan and sign the assumption
5. Confirm the seller's written release of liability is issued

What assuming costs: the gap and the payment

Take a $400,000 home with a $280,000 FHA balance at 3.00% and 25 years left, which leaves a $120,000 gap. The buyer can pay it in cash, borrow $106,000 on a 20-year second mortgage at an illustrative 8.50%, or skip the assumption and take a new loan at the 6.89% FHA average.

Paying the whole gap in cash keeps the payment at $1,526: $1,328 of principal and interest plus $198 of insurance. For a buyer without $120,000 on hand, the second loan cuts the cash to $14,000 and lifts the payment to $2,446.

Both routes borrow roughly $386,000 and need $14,000 in cash. The assumption prices $280,000 of that at 3.00%, but the other $106,000 carries 8.50%, so assuming plus a second loan costs $315 a month less than a new FHA loan: $2,446 against $2,761.

Costs that sit outside the payment

The table shows payments, not one-time charges. It also carries insurance that follows the loan: the assumed balance keeps its original premium, while a new FHA loan today pays 0.55% a year. Four items belong in your budget:

• FHA processing fee: capped at $1,800 under HUD Handbook 4000.1
• VA funding fee: 0.5% charged on a VA assumption
• Inherited MIP: older FHA loans often carry 0.85% a year
• Second-loan costs: its own closing fees, on top of a higher rate

When an assumption goes wrong

Assumptions fail on money, approval and liability more than on the rate, because all three have to line up before closing. These are the four ways the plan breaks:

• Equity gap: $120,000 in our example, in cash or a second loan
• Seller liability: without a written release, the seller may stay liable
• VA entitlement: a non-veteran buyer leaves the seller's entitlement tied to the loan
• Slow approval: servicer review can outlast a contract's closing date

HUD Handbook 4000.1 has the servicer review the buyer's creditworthiness before an FHA assumption and caps its processing fee at $1,800. A transfer without that approval can trigger the loan's due-on-sale clause, which federal law lets lenders enforce (12 U.S.C. 1701j-3).

Assuming vs. a new FHA loan vs. a new conventional loan

An assumption competes with the two ordinary ways to buy the same home: a new FHA loan and a new conventional loan. They differ in rate, cash needed, insurance and how approval works.

The FHA loan guide and VA loan guide cover each program's own rules, and the FHA loan calculator prices the new-loan alternative on your numbers. Run both before deciding the old rate is worth the gap.

Who an assumable mortgage fits

An assumption fits buyers who find a low-rate FHA, VA or USDA loan and can fund the equity gap. The rate advantage is worth the extra paperwork only when the gap is within reach.

• A listing with an assumable FHA, VA or USDA loan
• Cash or a second-loan lender for the equity gap
• Credit and income the servicer will approve
• A seller willing to wait through the servicer's review

Skip it if the seller's loan is conventional, the gap is beyond your cash and credit, or the rate advantage is small. A new loan avoids the servicer's review and the release-of-liability paperwork.

Assumable mortgages: pros and cons

What servicers look for

HUD has the servicer review a buyer's creditworthiness before an FHA assumption, so expect a full application: credit history, income, assets and debts. Servicers set their own standards, but FHA's origination guidelines, a 580 score and debt-to-income near 43%, are a reasonable planning yardstick.

On a VA loan, who the buyer is matters to the seller too. A veteran can substitute their own entitlement, which frees the seller's; a non-veteran leaves it tied to the loan. VA also charges a 0.5% funding fee on assumptions.

Requirements at a glance

• An FHA, VA or USDA loan on the home; most conventional loans are excluded
• Servicer approval of your credit, income and assets
• Cash or a second loan for the equity gap, $120,000 in our example
• FHA assumption fee capped at $1,800; VA funding fee of 0.5%
• The seller's written release of liability from the servicer
• For VA loans, your own entitlement if you want the seller's freed