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Maybe holding the keys to your own abode is on your bucket list. However, high interest rates might make you think your dreams of owning a home come true. But what if you could have a mortgage with an interest rate from, say, 10 or 15 years ago?

Enter the assumable mortgage. It’s a lesser-known path to homeownership where you “assume” or take over the seller’s mortgage. In turn, you get their existing interest rate, among other things. While it’s a valuable asset for buyers, there are some considerations.

We’ll walk you through the ins and outs of an assumable mortgage, explain how an assumable mortgage works, the types of home loans that are eligible, and give tips on how to secure one.

What is an assumable mortgage? 

An assumable mortgage is a special arrangement where an existing mortgage and its rates and terms are transferred from the owner to the buyer. The main draw is that you can get lower interest rates and more favorable terms.

As the buyer, you’re avoiding taking on a new mortgage by assuming the current owner’s debt, but you’ll still need to apply for an assumable mortgage.

Note that assumable mortgages aren’t the norm. That’s partly because the majority of home loans can’t be assumed. They’re only available through government-backed loans: VA, USDA, or FDA loans.

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How does an assumable mortgage work?

An assumable mortgage is when the current owner of the home signs their mortgage over to you. In turn, it lets you take over the terms and rates of the current mortgage, including:

Even though you’re not taking out your own mortgage, you still need to meet the lender’s qualification standards and get lender approval. If you don’t get the green light from the lender, you might be required to pay the remaining balance on the mortgage upfront.

To qualify, the lender will look at your credit and financial information, like your credit score and history, debt-to-income ratio, savings, income, and employment track record.

How to get an assumable mortgage

If you fit the criteria to go this route, you’ll need to work with the current homeowner and their lender to get an assumable mortgage. Here are the steps to take to get an assumption:

Find homes for sale with assumable mortgages

This is a bit more complicated than shopping around for a standard mortgage. That’s because homes eligible for an assumable mortgage aren’t normally advertised as such. You’ll need to do a bit of sleuthing.

As only government-backed home loans are assumable, a good place to start is to get a list of properties in the area you’d like to buy that were purchased with either an FHA, VA, or USDA loan.

Use title companies

Title companies can create a list with names and addresses, which can help you whittle down a list of potential properties. From there, you can contact homeowners to see if they might be interested in selling their home through the assumable mortgage route.

Title searches aren’t free and can charge anywhere from $75 to $200.1 The cost hinges on a handful of factors, like the property’s location.

Search for MLS listings

For the unacquainted, the MLS is short for Multiple Listing Service, a database that real estate professionals create and run. While you need to have a real estate license to fully access the private database, there are also public ones you can run a search on.

When you do a direct search for properties that might be eligible for an assumable mortgage, you can read through the comments on property listings. Mortgage brokers can input in the comments section of their MLS.

Target properties with default mortgages

If a homeowner has a mortgage that might have defaulted, they might be more open to the possibility of an assumable mortgage. That’s because going this route can help them avoid foreclosure.

Approaching a homeowner with a mortgage that’s in default means you might need to have extra cash to make up for missed payments or hop on a repayment plan.

Search your mortgage contracts

Once you’re at the stage where you are reading the mortgage contracts of a property, see if you can find anything that might hint that the mortgage is assumable. To help you work through legalese, you can partner with a real estate attorney.

Get your documents ready

Because you need to get the mortgage lender’s approval and pass their qualification standards, it’s a good idea to have your documents on hand. The application will be similar to applying for a mortgage, and you’ll need to undergo a similar underwriting process.

Documents the lender will ask you to provide are to help verify your income and employment, assets and debts, credit history, and rental history, and may include:

Pay your costs and cover seller’s equity

While you’ll need to pay closing costs, the good news is that the closing costs on assumable mortgages are lower than the typical 2% to 6% on a standard loan.

Besides closing costs, you’ll also need to cover the equity the seller has built in their home. In other words, this is how much of the mortgage that’s been paid off, which will essentially come in the form of a down payment.

For example: You’re taking over a $300,000 mortgage, and the current owner has built $100,000 in their home (aka they’ve paid $100,000 off from their mortgage). You’ll need to either finance that $100,000 as a second mortgage or pay it out from your funds.

Second mortgages can be trickier. First, they tend to have higher interest rates. Why’s that? For one, should the loan default, the first mortgage is considered the primary mortgage and will get paid first.

Sign your promissory note

The promissory note is a written agreement in which one party promises to pay the other party a specified sum of money. Once you’re signed it, you’ve sealed the deal. It’s now official that you’ll take over the seller’s mortgage. The buyer is now free from all obligations of the home loan.

Types of assumable mortgages

So, exactly what types of mortgages are assumable? As mentioned, only government-backed loans can be assumable mortgages. Last fall, only 15.2% of mortgages in the U.S. were FHA loans, and 4.9% were VA loans.²

Here are the types of mortgages that can be taken over by the buyer:

FHA loan

A Federal Housing Administration (FHA) loan is designed for first-time homeowners and usually has lower minimum down payment and credit requirements.

If the FHA loan originated on or after Dec. 15, 1989, it is assumable.³ However, you’ll be required to get approval from the lender. If the loan originated before that date, a loan might still be assumable. The main difference is that the lender doesn’t need to free the original buyer from liability.

VA loan

A VA loan is a special loan provided by the Department of Veteran Affairs (VA). It’s available for active service members, veterans and their families. A VA home loan usually features no down payment required, lower interest rates and no private mortgage insurance (PMI) requirements.

If the VA loan originated before March 1, 1998, the mortgage doesn’t need to be approved by the lender or any other party.⁴ The mortgage can still be assumed for VA loans that originated before the cutoff date. This is as long as the lender approves, and the new buyer is creditworthy and pays a processing fee.

USDA loan

USDA loans are assumable in that they can be transferred from the initial buyer who originated the loan. However, there is a difference between assumable mortgages backed by USDA loans and other government-backed loans: the lender might adjust the terms and rates.⁵

Getting an assumable mortgage from a divorce or death

In some cases, you might get an assumable mortgage because of a family death or a divorce. The lender will likely still need to see if you’re creditworthy and financially responsible and that you check off the minimum requirements to assume a loan.

Assumable mortgages: Pros and cons

While an assumable mortgage has obvious perks, it also comes with some downsides. Let’s look at both the pluses and minuses of going this route:

Pros

First, we’ll start with the advantages:

  • Lower interest rate. The main perk of an assumable mortgage is that you can get a lower interest rate – the one the seller secured when they took out their mortgage.
  • Don’t need to take out a mortgage. While you might not need to take out a mortgage, you’ll need to get the lender’s approval, which has steps that are similar to taking out a home loan.
  • Lower out-of-pocket costs. If the seller doesn’t have a lot of equity built into the home, you might have fewer upfront costs.

Cons

Now, for the drawbacks:

  • Need lender’s approval. While you might enjoy lower interest rates and more favorable terms, you’ll likely still need the lender’s sign-off. That usually involves an underwriting process similar to applying for a mortgage on your own.
  • Closing costs and paying for existing equity in the home. You’ll also be on the hook for paying closing costs and paying the seller for the equity in the home.
  • Might need to take out a second mortgage. If you can’t pay for the seller’s equity out of pocket, you might need to take out a second mortgage. If so, the risk of defaulting goes up.

What to expect with an assumable mortgage

No matter what mortgage you might land on in your journey in homeownership, knowing the risks and advantages of an assumable mortgage, figuring out if it’s a viable option, and the steps to get one can help for a smoother buying process.

Want to know the ins and outs of home loans? Learn more about how to get a mortgage.

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¹ Information from Rocket Mortgage's What Title Fees Will You Pay At Your Closing? as of January 26, 2024: https://www.rocketmortgage.com/learn/title-fees#

² Information from ATTOM's Home-Mortgage Lending Declines Again Across U.S. During Third Quarter As Mortgage Rates Climb as of January 26, 2024: https://www.attomdata.com/news/market-trends/mortgage-origination/attom-q3-2023-u-s-residential-property-mortgage-origination-report/#

³ Information from the U.S. Department of Housing and Urban Development's Mortgage Credit Analysis for Mortgage Insurance on One-to-Four-Unit Mortgage Loans Handbook (4155.1) Chapter 7: Assumable Mortgages as of January 26, 2024: https://www.hud.gov/sites/documents/4155-1_7.PDF

⁴ Information from the Department of Veteran Affairs Rights of VA Loan Borrowers Chapter 7: as of January 26, 2024: https://www.vba.va.gov/pubs/forms/26-8978.pdf

⁵ Information from the USDA's (HB-13350) Direct Single Family Housing Loans and Grants: Chapter 2: Overview of Section 502 Stressed as of January 26, 2024: https://www.rd.usda.gov/files/3550-1chapter02.pdf

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