Assumable Mortgage: What It Is, How It Works, Types, Pros & Cons

About Assumable Mortgage: 

An assumable mortgage is a type of financing arrangement whereby an outstanding mortgage and its terms are transferred from the current owner to a buyer. By assuming the previous owner’s remaining debt, the buyer can avoid obtaining their own mortgage. Different types of loans can qualify as assumable mortgages, though there are some special considerations to keep in mind.

  • An assumable mortgage is an arrangement in which an outstanding mortgage and its terms can be transferred from the current owner to a buyer.
  • When interest rates rise, an assumable mortgage is attractive to a buyer who takes on an existing loan with a lower rate.
  • USDA, FHA, and VA loans are assumable when certain criteria are met.
  • The buyer need not be a military member to assume a VA loan.
  • Buyers must still qualify for the mortgage to assume it.

Understanding Assumable Mortgages:

Many homebuyers typically take out a mortgage from a lending institution to finance the purchase of a home or property. The contractual agreement for repaying the loan includes the interest that the borrower must pay, as well as the principal repayments to the lender.

If the homeowner decides to sell their home later, they may be able to transfer their mortgage to the homebuyer. In this case, the original mortgage taken out is assumable.

An assumable mortgage allows a homebuyer to assume the current principal balance, interest rate, repayment period, and any other contractual terms of the seller’s mortgage. Rather than going through the rigorous process of obtaining a home loan from the bank, a buyer can take over an existing mortgage.

What Types of Loans Are Assumable?

Some of the most popular types of mortgages are assumable: Federal Housing Authority (FHA), Veterans Affairs (VA), and the U.S. Department of Agriculture (USDA). Buyers who wish to assume a mortgage from a seller must meet specific requirements and receive approval from the agency sponsoring the mortgage.

FHA Loans

FHA loans are assumable when both transacting parties meet the requirements for the assumption. For instance, the property must be used by the seller as their primary residence. Buyers must first verify that the FHA loan is assumable and then apply as they would for an individual FHA loan. The seller’s lender will verify that the buyer meets the qualifications, including being creditworthy. If approved, the mortgage will be assumed by the buyer. However, unless the seller is released from the loan, they are still responsible for it.2

VA Loans

The Department of Veterans Affairs offers mortgages to qualified military members and spouses of military members. However, to assume a VA loan, the buyer need not be a member of the military to qualify. However, the lender and the regional VA loan office will need to approve the buyer for the loan assumption, and most often, buyers who assume VA loans are military members.

For loans initiated before March 1, 1988, buyers may freely assume the VA loan. In other words, the buyer does not need the approval of the VA or the lender to assume the mortgage.3

USDA Loans

USDA loans are offered to buyers of rural properties. They require no down payment and often have low-interest rates. To assume a USDA loan, the buyer must meet the standard qualifications, such as meeting credit and income requirements, and receive approval from the USDA to transfer the title. The buyer may assume the existing rate of interest and loan terms or new rates and terms.4 Even if the buyer meets all requirements and receives approval, the mortgage cannot be assumed if the seller is delinquent on payments.

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