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With mortgage rates at their highest levels in decades, borrowers are desperate for ways to keep their monthly payments low.
In 2021, 30-year mortgage rates hit their lowest point ever, falling to 2.65%. But in 2023, they’ve remained well above 6% and have even trended up past 7% at times. This swift climb has many borrowers kicking themselves for not taking advantage of those low rates when they had the chance.
However, you don’t need a time machine to take advantage of a lower mortgage rate. You just need to find a seller with an assumable mortgage.
What is an assumable mortgage?
An assumable mortgage is a type of home loan. The seller transfers their existing mortgage to the buyer so the buyer doesn’t have to apply for a new mortgage.
As the buyer, you’ll take on the seller’s terms, including the interest rate, outstanding balance, and remaining term length. Your down payment must make up the difference between the sale price and the amount owed. For example, let’s say a home is for sale for $400,000, and the seller still owes $350,000. You’ll need to make a $50,000 down payment to cover the difference.
To assume a mortgage, you must meet qualifications for the mortgage such as a minimum credit score and maximum debt-to-income ratio. The lender will approve you, and the seller can request to be released from the mortgage.
Can a family member assume a mortgage?
You might be able to assume a mortgage from a family member. Look at their mortgage contract to get an idea of your options, then contact their lender to discuss details.
First, see if the contract clearly states that the mortgage is assumable. Then search for a due-on-sale clause. This is a provision in some contracts that states that the owner must pay off their mortgage in full if they transfer it to another person.
Even if there is a due-on-sale clause, some lenders list exceptions regarding family members. For example, it might state that a family member can assume the mortgage if the owner dies, or that the owner can transfer the mortgage to a child or spouse.
Regardless of the contract terms, you and/or the owner should reach out to the lender to talk about options. Even if the contract doesn’t allow them to transfer the mortgage to you, the lender might agree to add your name to the mortgage. In this case, both you and the original owner will be on the hook for payments.
What types of mortgages are assumable?
Typically, you can’t assume a fixed-rate conventional mortgage. In some cases, you may be able to assume an adjustable-rate conventional mortgage. There are three main types of mortgages that are assumable: FHA, VA, and USDA.
FHA
As the buyer, you must meet the lender’s criteria for an FHA loan. In most cases, this means at least a 580 credit score and a debt-to-income ratio of 43% or lower.
VA
For a VA loans, the original buyer must be an active military member, veteran, or family member. But you don’t need to be affiliated with the military to assume a VA mortgage.
The lender and regional VA loan office will need to approve you to assume a VA mortgage. The exception is for VA mortgages that originated before March 1, 1988 — then you don’t need lender or office approval.
USDA
USDA loans are for buyers who are earning a low-to-moderate income and buying a home in a rural area. To assume a USDA mortgage, you’ll need to meet income requirements for your county. You’ll also need to meet the lender’s credit score and debt-to-income ratio requirements.
Pros and cons of an assumable mortgage
Pros
- No appraisal. You don’t have to get a home appraisal when you assume a mortgage, which could save you hundreds of dollars. You may still want to schedule an inspection, though, to decide if you want to live in the home.
- Good option if interest rates are increasing. Are mortgage rates going up right now? You might be able to lock in a lower rate by taking on the seller’s mortgage than by applying for a new one.
Cons
- Poor option if interest rates are decreasing. If rates are going down right now, you may want to apply for a new mortgage and get a lower rate rather than assume a mortgage and get stuck with a higher rate.
- Potentially large down payment. You must make up the difference in the seller’s home equity. For example, if the home is selling for $300,000 and the owner still owes $200,000, you have to make a $100,000 down payment.
- Limited to the seller’s terms. With your own mortgage, you can shop around for the lender, mortgage type, term length, and interest rate you want. With an assumable mortgage, you are tied to the seller’s terms.
How much does it cost to assume a mortgage?
The cost to assume a mortgage partly depends on the amount of your down payment. You’ll need to pay the difference of what the home is worth versus how much the seller still owes. This could be a few thousand dollars or tens of thousands of dollars.
You’ll also have to pay closing costs as you would with a regular mortgage (with the exception of the appraisal fee). According to ClosingCorp, the average mortgage closing costs in the first half of 2021 were $3,860 without transfer taxes and $6,905 with taxes.
Assuming a mortgage could be the right move if you can afford the down payment and can lock in a good interest rate. It’s a complicated process, though, so talk to the lender about your options.
How to find an assumable mortgage
It can be difficult to find a seller with an assumable mortgage, particularly because some sellers might not even realize they have one, and thus don’t advertise it.
You can try to find available homes with assumable mortgages on them by doing a keyword search on a real estate listing site like Zillow or Redfin.
You could also try asking the seller, or having your real estate agent ask, if you find a house you like and are wondering if they have a mortgage that’s assumable.
A new service called Roam aims to help buyers connect with sellers who have assumable mortgages. Roam says that when you sign up, it will find listings for you with assumable mortgages that have rates below 5%. At closing, you’ll pay a 1% fee.
Assumable mortgage FAQs
It means that a homebuyer can take on, or assume, a seller’s existing mortgage, along with the rate, principal balance, and other terms that come with it.
Assuming a mortgage can be a good idea when rates are high if you can get a significantly lower rate with the assumable mortgage.
Conventional mortgages generally aren’t assumable. But government-backed mortgages, including FHA, VA, and USDA loans, are assumable.
One of the main disadvantages of an assumable mortgage is that it can end up being really expensive. As the buyer, you’ll need to come up with the funds to cover the seller’s current equity, which could be thousands of dollars more than a standard down payment.
