A Guide to Assumable Mortgages in Today’s Market
Skyrocketing mortgage interest rates can make homeownership seem like an elusive dream. With rates hitting their highest point in almost 23 years, the path to purchasing a home has become more challenging. For some home shoppers, there’s a potential solution: assumable mortgages.
Assuming a mortgage allows you to step into the shoes of the seller and take over their loan, often at a lower interest rate. It’s a unique approach that can make your dream of owning a home in today’s complex, high-priced housing market more attainable.
In this guide, we’ll walk you through the ins and outs of assumable mortgages, helping you make an informed decision that’s right for you.
What is an assumable mortgage?
An assumable mortgage allows a buyer to purchase a home by taking over the seller’s existing mortgage loan. One reason more buyers are seeking assumable mortgages is to take advantage of lower interest rate financing. Many home sellers entering the market today refinanced during the pandemic era of historic low interest rates.
Thus, assuming a mortgage can be like inheriting a financial advantage. Rather than taking out a new loan at a high rate, the homebuyer can assume the interest rate, current principal balance, repayment period, and other terms of the seller’s existing mortgage.
However, not all mortgages are assumable, and there may be specific qualifications and fees associated with assuming a home loan. There are also new products and programs entering the market to help walk buyers and sellers through the assumption process.
Which mortgage loans are assumable?
To determine if a mortgage loan is assumable, you need to consider the type of loan and its specific terms. The most common loans that can be assumed are typically government-backed or government-insured loans. Here are some common types of mortgage loans and their assumability:
1. FHA loans
Federal Housing Administration (FHA) loans are often assumable. This means that a qualified buyer can take over the existing FHA loan, subject to lender approval. You will need to qualify for traditional FHA loan requirements, such as having a credit score of at least 580 and being able to make a minimum down payment of 3.5%.
2. VA loans
Similarly, loans guaranteed by the Department of Veterans Affairs (VA) are typically assumable. However, you’ll need to meet certain eligibility criteria, such as holding a credit score of 620 or higher, and the VA must approve the assumption. Surprisingly, you don’t necessarily need to be a veteran or active military service member to assume a VA loan. As with other lending options, your creditworthiness as a borrower will play the biggest role. You will also be required to pay the standard 0.5% VA funding fee.
3. USDA loans
United States Department of Agriculture (USDA) loans may also be assumable, but like VA loans, they come with specific conditions. In this case, you’ll likely need approval from both your lender and the USDA, and still hold a credit score of 620 or higher. An assumed USDA loan is typically assigned a new interest rate and terms. However, in some circumstances, like the transfer of property within families, the loan can be assumed with the original rate and terms without the borrower meeting all the eligibility requirements.
4. Some jumbo loans
Some jumbo mortgages that are originated by larger banks and not sold to Fannie Mae and Freddie Mac can be assumed. These circumstances are uncommon, however, and it can be difficult to know which jumbo mortgages are assumable.
5. Some adjustable-rate mortgages (ARMs)
ARMs are typically 30-year loans with a fixed rate for an initial period, such as five, seven, or ten years. According to Freddie Mac, some lender agreements “provide that the ARM is assumable for the life of the loan.” Other agreements “provide that the ARM is assumable only after the initial fixed-rate period has expired or until a specified event has occurred, and is thereafter not assumable.”
Because of their variable nature, assuming an ARM loan is not common and may not always be advantageous for the buyer. In cases where a conventional ARM loan has been deferred or modified to help the borrower avoid default, the loan is likely no longer eligible to be assumed by a third party.
Are conventional loans assumable?
The majority of conventional mortgages offered by private lenders — loans backed by Fannie Mae and Freddie Mac — are not automatically considered assumable. Some conventional loans can be assumable in cases involving special circumstances, such as after a death or divorce. To qualify, the homeowner’s mortgage contract would need an “assumption clause” noted in the mortgage contract.
An assumption clause allows the mortgage holder to transfer the loan to another party. But even with this provision, the mortgage lender typically needs to approve the transfer. The new borrower would still need to meet the loan’s eligibility requirements.
