Key takeaways

  • Assuming a mortgage means the current borrower signs the balance of their loan over to you, and you become responsible for the remaining payments.
  • Most conventional mortgages are not assumable, but many government-backed loans (FHA, VA, USDA) are.
  • The lender must approve you assuming the mortgage, and at the closing, you must compensate the old borrower for the amount they’ve paid off.

Used cars. Pre-owned furniture. Secondhand clothing. All of these goods can be smart money-saving purchases. So, what about mortgages? The idea might sound crazy, but in fact, a buyer can take over, or “assume,” a seller’s mortgage in some cases. The process isn’t easy, but both buyers and sellers should know how an assumable mortgage works, when it’s desirable and who it benefits the most.

What is an assumable mortgage?

An assumable mortgage allows a buyer to assume the rate, repayment period, current principal balance and other terms of the seller’s existing mortgage rather than get a brand-new loan.

The biggest potential advantage for the buyer is that the terms of the seller’s mortgage might be more attractive than the prevailing terms the buyer would be offered on a new mortgage. The interest rate is key, though other factors should be weighed, too.

Overall, assuming a mortgage can be simpler, easier and less costly for the buyer, says Lemar Wooley, a former spokesperson for the U.S. Department of Housing and Urban Development.

How do assumable mortgages work?

When you assume a mortgage, the current borrower signs the balance of their loan over to you, and you become responsible for the remaining payments. That means the mortgage will have the same terms the previous homeowner had, including the same interest rate and monthly payments.

And you will still have to come with some cash at the closing. If you assume the mortgage, you’ll need to compensate the seller for the equity they’ve built up in the home — the amount of the mortgage they’ve paid off. While this is part of the overall purchase price, you have to pay it right away — as part of your down payment, basically. The funds can come out of your own pocket, or you can finance the sum via another loan.

For example, if someone owns a home valued at $400,000 with an outstanding mortgage balance of $250,000, that means they own $150,000 worth of the home outright. You’d need to make a cash payment of $150,000 to “repay” the seller for their equity stake.

Assuming a mortgage after death or divorce

Assuming a mortgage doesn’t just have to happen through a sale, though. A family member (or sometimes even non-relatives) can assume an existing mortgage on a home they’ve inherited. Or if one person is awarded sole ownership of a property in divorce proceedings, that person can assume the full existing mortgage themselves.

In both cases, assumption is allowed even if the contract doesn’t include an assumption clause, or if it’s a conventional loan. In an inheritance scenario, the new borrower does not need to qualify for the loan in order to assume it, if they were related to the deceased.

What types of mortgage loans are assumable?

Most conventional mortgages — the ones offered by private lenders — are not assumable. They contain what’s called a due-on-sale or due-on-transfer clause, which mandates the mortgage be paid in full whenever the original borrower sells the residence.

Mortgage
Up until the 1980s, assumable mortgages were the norm. That changed in 1982 with the passage of the Garn-St. Germain Act, which let lenders enforce due-on-sale clauses if a property changed hands (previously, state laws could block such actions). The Act did specify exceptions to lenders being able to call a loan in, however — often in the case of death or divorce.

But in certain special circumstances, conventional loans can be assumable. To know whether your mortgage is assumable, look for an assumption clause in your mortgage contract. This provision is what allows you to transfer your mortgage to someone else. In most cases, the mortgage lender has to approve the assumption, and typically will hold the new borrower to the loan’s eligibility requirements.

The sort of mortgages that can be assumed nowadays are generally government-backed or -insured loans, including:

  • FHA loans: For FHA assumable mortgages, you’ll need to meet standard FHA loan requirements. These include being able to make a minimum down payment of 3.5 percent with a credit score of at least 580.
  • USDA loans: To assume a USDA loan, you typically need a minimum credit score of 620. You also have to meet income limits and location requirements. A USDA loan is typically assumed with a new rate and terms, but in some cases, like transfers between families, it can be assumed with the same rate and terms without needing to meet eligibility requirements.
  • VA loans: You don’t necessarily have to be a member of the military or a veteran to assume a VA loan, but the lender will evaluate your creditworthiness as a borrower. While there isn’t a minimum credit score, a lender will typically look for a score of 620 and above. You’ll also still have to pay the VA funding fee.

Pros and cons of assumable mortgages

Assuming a mortgage has its pros and cons to consider before deciding it’s the right move for you as the seller or as the buyer:

Pros and cons for the seller

Pros

  • Your home can be more desirable – If your existing mortgage has a lower-than-market interest rate, it can be a selling point with buyers — especially if you haven’t built up much equity in the home.
  • Faster debt pay-off – If the buyer is able to qualify and assume the loan, the seller can be relieved of their debt obligation much faster than with a traditional sale.

Cons

  • You could still be responsible for the debt – If the buyer doesn’t make payments, the seller could potentially be negatively affected. “If the lender doesn’t release the original borrower from liability for the mortgage, and the assumptor defaults, then the original borrower suffers damage to his or her credit rating,” Wooley says. And could even be on the hook for payments.
  • Extended processing time – The approval process for assuming a mortgage can take up to 90 days.
  • Limited pool of qualified buyers – Not all buyers are qualified or interested in assuming someone else’s debt. This limitation can narrow the field of potential buyers, as the pool is restricted to only those who meet the specific income and credit qualifications set forth by the lender.

Pros and cons for the buyer

Pros

  • Your home can be more desirable – If your existing mortgage has a lower-than-market interest rate, it can be a selling point with buyers — especially if you haven’t built up much equity in the home.
  • Faster debt pay-off – If the buyer is able to qualify and assume the loan, the seller can be relieved of their debt obligation much faster than with a traditional sale.

Cons

  • You could still be responsible for the debt – If the buyer doesn’t make payments, the seller could potentially be negatively affected. “If the lender doesn’t release the original borrower from liability for the mortgage, and the assumptor defaults, then the original borrower suffers damage to his or her credit rating,” Wooley says. And could even be on the hook for payments.
  • Extended processing time – The approval process for assuming a mortgage can take up to 90 days.
  • Limited pool of qualified buyers – Not all buyers are qualified or interested in assuming someone else’s debt. This limitation can narrow the field of potential buyers, as the pool is restricted to only those who meet the specific income and credit qualifications set forth by the lender.

How to qualify for an assumable mortgage

To assume a mortgage, your lender has to give you the green light. That means meeting the same requirements that you’d need to meet for a typical mortgage, such as having a good enough credit score and a low DTI ratio. Prepare documents such as proof of income and identification for the lender so they can determine if you’re a low-risk candidate for paying back the remaining mortgage.

How to assume a mortgage

To assume another borrower’s mortgage, take these steps:

  1. Confirm that the loan is assumable – Check that the loan is, in fact, assumable. It’s also a good idea to speak with the current mortgage holder’s lender to confirm first-hand they’ll allow the assumption and that the loan is in good standing.
  2. Prepare for the costs – You’ll need to make a down payment, but the amount depends on how much equity the seller has. Once the assumption has been approved, you’ll also have to pay closing costs, but these are generally lower when you assume a mortgage compared to getting one on your own.
  3. Submit your application – The assumption process could look different from lender to lender, but in general, you’ll need to fill out an application, provide proof of income and assets and submit to a credit check.
  4. Close and sign liability release – If the assumption is approved, you’ll need to fill out paperwork just as you would when closing any other type of home loan. This might include a release of liability confirming that the seller is no longer responsible for the mortgage.

Assumable mortgage FAQ

  • The costs associated with assuming a mortgage are often similar to the fees for taking out a new mortgage. You may be responsible for real estate agent commissions, a down payment, closing costs and an inspection fee. Plus, you will be responsible for an assumption fee that is specific to this type of transaction. Still, the costs are often worth it if the assumable mortgage comes with a lower interest rate than what you’d be able to get with a new loan.
  • It depends. Assuming a mortgage can be beneficial in certain situations, such as when the seller’s original mortgage has a lower interest rate than what is currently available on the market, or in high-interest-rate markets. However, the process of assuming a mortgage can be complex and costly, and not all buyers will qualify. Whatever you do, be sure to have a real estate attorney carefully look over any agreement or contract.

    Before deciding to assume a mortgage, consider the following facts:

    • The buyer must qualify based on credit score, income and other criteria set by the lender.
    • Only certain types of loans are assumable.
    • There may be additional costs for assuming a mortgage, including assumption fees and mortgage insurance payments.
    • The buyer will need to repay the seller for their equity stake in the home upfront, which can mean paying a sizable down payment.