What is an assumable mortgage?

Key Insights

• Assumable loans can translate to savings for buyers.
• Sellers may find their home appeals to a larger pool of potential buyers.
• Only certain types of loans qualify.

You may have heard the term “assumable mortgage,” but what does it mean, and how might it apply to your home sale or purchase? Here, we explain the basics of assumable loans and how they can benefit buyers and sellers.

1. What is an assumable mortgage?

As a buyer, wouldn’t it be nice if you could take over a seller’s loan (and their low interest rate) when buying their home? The type of home financing arrangement that makes this possible is called an assumable mortgage, and it essentially allows a buyer to take on the seller’s interest rate, payment period, current principal balance and other terms of the existing mortgage. While the buyer doesn’t need to take out their own mortgage loan, they typically still need to qualify for it by demonstrating their creditworthiness and ability to repay the loan.

2. What is needed for a loan to be assumable?

Only certain types of loans qualify as assumable, and a buyer (and seller) must meet specific criteria to qualify, plus receive approval from the lender and the entity backing the loan. The following loan types may be assumable:

• Federal Housing Authority (FHA)
• Veterans Affairs (VA)
• U.S. Department of Agriculture (USDA)

Most conventional mortgages are not assumable. In all cases, some specific requirements must be met for eligibility. For example, most USDA loan assumptions involve new rates and terms, and the mortgage cannot be assumed if a seller is behind on their payments.

3. Why would I want to buy or sell with an assumable mortgage?

Assumable mortgages are especially enticing to buyers when the assumable loan's interest rate is lower than current interest rates, allowing you to pay less over the long term. There also may be lower closing costs. However, if the seller has considerable home equity, you will need to pay a large down payment (in the amount of the seller’s equity balance) or take out a second mortgage to cover it.

Sellers who can offer an assumable loan may appeal to a larger pool of buyers, especially where a low interest rate and lower home equity are present. Sellers should make sure to release their liability in writing at the time of the loan assumption to avoid any future liability if a buyer fails to make their monthly payments.

4. How can I tell whether a loan is assumable?

If you’re a seller who is wondering whether your loan is assumable, you can typically consult your mortgage contract. If it says, “due on sale” or “due on transfer,” it is not assumable and must be paid in full when the property is sold or transferred.

If you’re a buyer searching for homes, the process of finding properties for sale with assumable mortgages can be a little bit trickier. Your REALTOR® is a good resource for uncovering these opportunities for you.

Get help with your questions

Doing your research when buying or selling a home is an important part of the process. Reach out today and our experts can answer your questions and get you started on the path to a successful home sale or purchase.

*Edina Realty Insurance is an affiliate of Edina Realty. See Affiliated Business Arrangement Disclosure Statement