Assumable Mortgages Explained: The Appeal and the Pros and Cons

Assumable mortgages can be taken over by someone else, offering buyers and sellers a simpler alternative to the ordinary way property changes hands. When you assume someone's mortgage, you step into their shoes at that point in the loan term, taking over the remaining payments and becoming the home's new owner.

During times of high interest rates, assuming someone's mortgage at one of the great lower rates of yesteryear will save you a lot of money compared to taking out a new mortgage.

Of course, some restrictions apply. The person who assumes the mortgage will need to meet or exceed a minimum credit score. Moreover, conventional mortgages are not assumable. When the mortgage is backed by a bank or other private lender, the mortgage holder cannot transfer the loan and its responsibilities to someone else.

So which mortgages are assumable, and what are the benefits of buying or selling a home through an assumable mortgage? Let's take a closer look at assumable mortgages, where to find them, and how they work.

Which Home Mortgages Are Assumable?

Government-backed home loans are assumable. This puts another feature in the plus column for these types of loans, alongside lower minimum down payments and lower credit score requirements. The following mortgages are assumable.

• VA loans: These loans are insured by the Department of Veterans Affairs. Even though the money is loaned by private lenders, VA loans enjoy all the benefits of government-backed mortgages, including assumability. You can assume a VA loan without any military participation yourself.
• FHA loans: All loans backed by the Federal Housing Administration are assumable.
• USDA loans: Homebuyers in rural areas can qualify for these FHA-style mortgages, and they are all assumable.

Almost a third (29.3%) of all purchase mortgages for owner-occupied, one- to four-family homes that closed in 2021 were government backed, according to official data.¹ The share of such loans hovers around 30% every year. This means that, depending on the region, if you'd like to buy a home by assuming someone's mortgage instead of taking out a new mortgage yourself, you have a pretty good chance of finding an assumable mortgage.

How an Assumable Mortgage Works

Sellers who are open to the idea of a buyer assuming their mortgage should get approval from their lender up front to avoid penalties and other bad surprises later. If two parties work out a deal under the table to take over a mortgage, neither party is protected, and a lender who learns about it could demand full payment on the outstanding balance.

When the seller finds a buyer, the lender will evaluate the buyer's creditworthiness, employment history, and other financial information. The buyer will also be required—just like the original borrower—to live in the home after purchase. Investors do not qualify to take over assumable mortgages.

The qualified buyer must pay the difference between the home's current value and the outstanding loan amount. For example, to assume the mortgage on a $300,000 home with a balance of $216,000, the buyer will need to pay $84,000. Getting the money may necessitate taking out a home loan.

Taking over an assumable mortgage comes with closing costs, generally 2%-5% of the loan amount. Fortunately, the government agencies whose mortgages are assumable (VA, FHA, USDA) cap those costs, so they probably won't be as high as they can be with conventional loans.

A home inspection is not mandatory to assume a mortgage, but it's highly recommended. The buyer should be aware of any expensive problems before the sale closes.

Although a mortgage assumption could be handled by the lender, seller, and buyer, we recommend working with an agent, who can coordinate such details as how and when the buyer will pay the seller the outstanding mortgage balance.

Advantages of Assumable Mortgages

Assumable mortgages are a legal way to step into a homebuyer's shoes and take over a mortgage and the house that goes with it. They offer compelling advantages to buyers and sellers alike.

Advantages for the buyer.

When you assume someone's mortgage, their interest rate becomes yours. Getting a remarkably low interest rate this way will save you thousands of dollars over the remaining term.

Our payment calculator easily shows you the savings you get from just one or two percentage points. For example, if you assume a mortgage with 15 years left at 4.5%, your monthly principal and interest payment would be $1,721—the same as the person you assumed the mortgage from. But if you had to take out a new mortgage at prevailing rates, like 6.5%, your payment would be $1,960. The mortgage assumption saves you $239 a month, or $2,868 every year.

To assume a mortgage, you won't need a great credit score. You'll face the same requirements as the original borrower, and because we're talking about government-backed mortgages (VA, FHA, USDA), the minimum credit score will be 500-580, well below what private lenders want.

You could get a coveted VA loan without being a veteran or in the military yourself. VA loan interest rates are often lower than the rates for FHA and conventional loans. VA loans do not require mortgage insurance. These are both money-saving features of VA loans that civilian borrowers envy.

Advantages for the seller.

Offering an assumable mortgage with one of yesteryear's dramatically low interest rates could make your listing the most popular in town. Buyers choosing between your property at, say, 4% and the one across the street at the going rate of 7% would be insane not to choose yours, everything else being equal.

Such a low interest rate would be impossible to get otherwise, which puts the seller in a strong negotiating position. You can ask for a higher price and still attract buyers, and you won't have to make concessions.

If you open yourself to the idea of letting someone take over your mortgage, you widen the pool of potential buyers. When interest rates are high and many buyers are pressing pause on their house hunt, your home could be on the market a while. But indicate that your mortgage is assumable in the listing, and you attract another stratum of buyers hoping to carry on your mortgage at your lower rate.

Disadvantages of an Assumable Mortgage

Assuming a mortgage carries four potential disadvantages, one of which is easy to avoid. Not on the list but worth mentioning is that finding homes for sale through assumable mortgages can be difficult simply because many sellers don't know about that option. About one in three owners has an assumable mortgage at any given time, per the statistic mentioned above, but much fewer know about the advantage of selling that way.

You might be tempted to skip the appraisal.

Because a home inspection isn't required, some buyers will take over the mortgage on a home they've only walked through themselves (if that). They might be unaware of impending problems, like black mold or faulty plumbing. Avoid this disadvantage by always ordering an inspection of any home you plan to buy.

Probably more money up front.

The primary disadvantage of an assumable mortgage is that you'll probably need more cash to buy a home than if you were making a down payment on a conventional mortgage. The average down payment in America recently was 13% of the purchase price of the home, but with an assumable mortgage, you don't pay a percentage but rather the difference between the home's value and the mortgage balance. If those numbers are close, great. But if the home has appreciated a lot, you'll need considerable cash and might need a loan to get it.

Veteran-to-civilian sales face an obstacle.

Another disadvantage of an assumable mortgage has to do with VA loans. The original homeowner used his or her VA benefit (entitlement) to buy the home, and if their loan is assumed by a civilian, the entitlement stays with the home and the veteran can't use it to buy another place. To avoid this downside of assumable mortgages, a veteran should only allow another qualified veteran to assume the mortgage. In that case, the buyer's entitlement replaces the seller's in the loan and the seller is free to reuse his or her benefit elsewhere.

Mortgage insurance.

The fourth disadvantage is that FHA and USDA loans require mortgage insurance for a long time, possibly the life of the loan. Whereas you could avoid mortgage insurance on a conventional mortgage by making a bigger down payment, there's no way to escape it when you assume an FHA or USDA loan. Remember, you assume all the details of the mortgage when you take it over, even the parts you'd rather leave out.

How to Shop for Assumable Mortgages

You can find an assumable mortgage by including assumable as a keyword when searching available listings. This will find sellers who are at least considering letting a buyer assume the mortgage. Try contacting prominent real estate agents in your area too to tell them you're looking to buy a place through an assumable mortgage.

Key Takeaways About Assumable Mortgages

• Government-backed home mortgages are assumable, conventional mortgages are not.
• The buyer of an assumable mortgage takes over all details of the loan as if he or she were the original borrower.
• With an assumable mortgage, you could buy a home at a much lower interest rate than is available today.
• The seller of an assumable mortgage with an enviably low interest rate can ask a high price and sell quickly.