“Assume” Makes a Great Deal for You and Me, Right? What to Know About Your Assumable Mortgage

Got a government-backed mortgage with an assumable loan? If you decide to sell, a buyer might jump at the chance to get, say, a 3% interest rate instead of something between 6% and 7%.

An assumable loan lets the mortgage stay on the home, even though you transfer the home’s deed to a new owner. So, you can transfer your existing mortgage along with your home’s title. Lucky buyer!

If you’re selling a home, you might point to a possible mortgage assumption among the features you advertise in your listing. And if you’re looking to buy, it could be worth the effort to seek out a home with an assumable loan in 2023 and beyond.

Which Loans Are Assumable?

Most conventional loans aren’t assumable. But most government-backed loans are, if the parties get the approval of the lender.

  • Mortgages backed by the U.S. Federal Housing Administration (FHA) are assumable.
  • Many rural and suburban homes were bought with USDA loans, which are generally assumable.
  • VA loans can be assumed, vet to vet. The funding fee will be reduced, compared to the fee for a new VA loan. (The catch? A seller might lose access to VA loan benefits until the buyer pays off the assumed loan in full.)

With all of these loans, by transferring rather than breaking a mortgage, the seller can avoid the penalties that most sellers need to pay lenders. Sellers should check with their mortgage companies for precise terms.  

Sweet Deal for a Buyer; In the Right Circumstances

A buyer who assumes an existing mortgage won’t have to reset the mortgage term, so the time for paying off the balance will be shorter. The buyer steps into the shoes of the current mortgage holder. That means paying more principal and less interest right off the bat.  

Assuming a mortgage can significantly cut the cost of buying a home. If a buyer can assume a very low-rate loan, the savings year by year could be impressive. In effect, getting a partially paid-off loan can help a buyer qualify for more in property value.  

Because the loan is already established, some of the closing costs will be reduced or waived, too. 

So far, sweet!

It Can Be a Sweet Deal for the Seller, Too

If your home is financed with an assumable loan, you have a selling point to advertise when you go to sell. And this selling point could add substantial value to your offering in times of elevated mortgage rates.

The seller will be sharing their mortgage account information with potential buyers. Is it worth it? Maybe so. Some buyers would drop everything else for a home that comes complete with a low monthly mortgage payment. Some could be willing to pay more for that home.  Also, a mortgage assumption option could help sell a home that lacks other selling points.

Topping it off are the tax-related reasons to transfer the loan. Sellers, speak about your potential transaction with a tax specialist. Potential tax deductions include your loan fees, points, and other costs. 

Is the Buyer Vetted for Eligibility to Assume the Loan?

The lender vets the buyer, yes. That means scrutinizing credit, income, and reserve funds. And this could add extra time to the transaction, because the buyer is not going into the deal with a pre-approval letter already in hand. The buyer could need to apply for new financing to be able to afford the deal. So, a buyer takes on roughly the same amount of work to assume a loan as in getting a new loan. And the buyer might not be getting enthusiastic support from the lender to do it. Mortgage companies rarely promote loans with low rates, as those result in smaller fees for the lenders.

All things considered, it’s common for a buyer’s timeline to stretch out an extra two months or more to process an assumable loan.

Words to the Wise: Mortgage Assumption Considerations to Know

Assumption is an agreement between the parties that one will take over from the other. This does not release the original mortgage holder from liability to the lender.

If you’re a seller:

  • Keep making mortgage payments until the loan is in the buyer’s name.
  • Keep tabs on your homeowner’s insurance account for a smooth transition, so you’re not paying the buyer’s premium.

And if you’re the buyer:

  • You’ll pay an assumption fee (but this can be offset by other savings as described above).
  • You’ll need to be ready with the funds covering the difference between the loan balance and the home’s sale price.

Both the buyer and seller can benefit from a good mortgage consultant’s guidance. Whether transferring or assuming a loan, speak to your mortgage servicer about the terms, including liability releases, before jumping in.

Loan Assumption in a State-Regulated “Subject To” Sale

A person who assumes a loan is buying a home “subject to” the existing mortgage. Check the home’s state law to find out how it regulates “subject to” sales, in which:

  • The seller will not be paying off the existing balance;
  • The buyer assumes the mortgage responsibility; and
  • The outstanding mortgage balance is placed into the sale as part of the buyer’s purchase price.

In real-world terms, when taking on a loan is part of the deal, then the sale is subject to the buyer’s gathering down payment funds that cover the equity (value of the home, minus the loan debt). Buyers might need time to gather those funds, depending on the home’s value and the mortgage balance. Applying for a bridge loan could be necessary to pull off the purchase.

Sellers should carefully plan for this time period. The seller’s agent could tack several months of mortgage interest onto the asking price to cover that period. Again, the agent and any consultants involved will adhere to the home’s state law.

Now You Know What “Assume” Does!

Most homes across the United States have low mortgage rates. That’s because so many were bought or refinanced in the 2010-2021 period when rates were under 5%. Now, mortgage rates are much higher. This means an assumable loan is very attractive. Still, there are certain factors that can make assuming a loan challenging.

We hope you’ve found some new information in our overview of the pros and cons for sellers and buyers. In the right situation, an assumable loan could be fabulous for seller and buyer alike.

Once you get into the market, your real estate agent and your mortgage pro will have situation-specific (and state-prescribed) guidance. But if you’re ready to ask the right questions, you’ll get more out of those relationships.

Good luck out there.

Supporting References

Kathleen Willcox for the National Association of Realtors® via Realtor.com®: Mortgage Rates Too High? Check Out This Little-Known Low-Rate Loophole That’s on the Rise (Jun. 22, 2023).

Perch Mortgage Brokerage via MyPerch.io: Never Make Assumptions, Unless It’s a Mortgage Assumption (updated Sep. 26, 2022).

Deeds.com: Interest Rates on the Rise? Assumable Mortgages Never Looked Better (Apr. 19, 2021).

And as linked.

More on topics: Mortgage rates in 2023, Federal Reserve hikes rates

Photo credits: Edmond Dantès and Oleksandr Canary Islands, via Pexels.