# Assumable Mortgage: What It Is, How It Works, and Types

> **Definition**
>
> With an assumable mortgage, a homeowner agrees to transfer the outstanding mortgage on their house to you once you've purchased the latter. Through this kind of arrangement, you can acquire a property without having to get a new mortgage for the full price (and potentially secure a lower interest rate).

## What Is an Assumable Mortgage?

An assumable mortgage is a type of home financing arrangement where an outstanding [mortgage](https://www.investopedia.com/the-best-mortgage-lenders-11714101) and its terms are transferred from the current owner to the buyer. By assuming the previous owner's remaining debt, the buyer can avoid obtaining their own mortgage, which may come with higher [interest rates](https://www.investopedia.com/mortgage-rates-5094943). Different types of loans can qualify as assumable mortgages, though there are some special considerations to keep in mind.

### Key Takeaways

*   An assumable mortgage allows a homeowner to transfer their outstanding mortgage and its terms to a homebuyer.
*   An assumable mortgage can be an appealing option when interest rates rise, as the buyer can potentially take on an existing loan with a lower rate.
*   A buyer must still qualify for the mortgage in order to assume it.

![Assumable Mortgage: An arrangement in which an outstanding mortgage can be transferred from the current owner to the buyer.](https://www.investopedia.com/thmb/bEaFd1BkizIFg_UhZAGy4MH_MdU=/1500x0/filters:no_upscale():max_bytes(150000):strip_icc()/assumablemortgage.asp-final-0ac630cda1324981b5c4729096f81a46.png)

*The cost-effectiveness of an assumable mortgage will vary based on how much equity is in the home. — Investopedia / Mira Norian*

## How an Assumable Mortgage Works

If you're buying a house, you can take out a [mortgage](https://www.investopedia.com/terms/m/mortgage.asp) from a lending institution to finance the home or property purchase. The contractual agreement for repaying the mortgage includes paying the [principal payments](https://www.investopedia.com/terms/p/principal.asp) plus interest to the lender.

If you decide to sell your home later, you may be able to transfer the [mortgage](https://www.investopedia.com/terms/m/mortgage.asp) to the homebuyer. In this case, the original mortgage is assumable.

An assumable mortgage allows a homebuyer to assume the current principal balance, [interest rate](https://www.investopedia.com/terms/i/interestrate.asp), repayment period, and any other contractual terms of the seller's mortgage. A buyer can take over an existing mortgage rather than going through the rigorous process of obtaining a home loan from a bank.

In a period of rising interest rates, borrowers will face higher interest rates on any loans for which they're approved. If current interest rates are higher than the rate on the assumable mortgage, there could be a cost-saving advantage.

An assumable mortgage may have a lower interest rate, an attractive feature for buyers. However, if the assumable mortgage has a fixed interest rate, it won't be impacted by rising interest rates. A [mortgage calculator](https://www.investopedia.com/mortgage-calculator-5084794) can be a good resource for budgeting for the monthly cost of your payment.

## What Types of Loans Are Assumable?

Some of the most popular types of mortgages are assumable:

*   [Federal Housing Administration (FHA)](https://www.investopedia.com/terms/f/fhaloan.asp)
*   [United States Department of Agriculture (USDA)](https://www.investopedia.com/usda-loan-5116841)
*   [U.S. Department of Veterans Affairs (VA)](https://www.investopedia.com/terms/v/valoan.asp)

If you're a buyer who wishes to assume a mortgage from a seller, you must meet specific requirements and receive approval from the agency sponsoring the mortgage.

### FHA Loans

FHA loans are assumable when both parties meet the requirements for the assumption. For instance, the property must be used by the seller as their primary residence. If you were the buyer, you must verify that the FHA loan is assumable and apply as you would for an individual FHA loan. The seller's lender will verify that you meet the qualifications, including your creditworthiness. If approved, you'll then assume the mortgage. However, until the seller is released from the loan, they're still responsible for it.

### USDA Loans

USDA loans are offered to buyers of rural properties. They require no [down payment](https://www.investopedia.com/terms/d/down_payment.asp) and often have low interest rates. To assume a USDA loan, you must meet the standard qualifications, such as satisfying credit and income requirements, and receive approval from the USDA to transfer the title.

Most USDA loan assumptions result in new rates and terms. However, some assumptions, such as title transfers between family members, may include the same rate and terms. Even if you meet all requirements and receive approval, the mortgage cannot be assumed if the seller is delinquent on payments.

### VA Loans

The Veterans Benefits Administration offers mortgages to qualified military members and spouses of military members. However, to assume a VA loan, you need not be a member of the military to qualify.

Keep in mind that the lender and the regional VA loan office will need to approve you for the loan assumption. Additionally, the seller may prefer to accept an offer from a qualified military borrower so that they can keep their VA loan entitlement for another home purchase. Otherwise, the entitlement stays with the property until the mortgage is paid off.

Buyers may freely assume the VA loan for loans initiated before March 1, 1988. In other words, you wouldn't need the approval of the VA or the lender to assume the mortgage.

> **Important**
>
> Conventional loans backed by Fannie Mae and Freddie Mac generally aren't assumable, though exceptions may be allowed for adjustable-rate mortgages (ARMs). Upfront fees on Fannie Mae and Freddie Mac home loans changed in May 2023. Fees were increased for homebuyers with higher credit scores, such as 740 or higher, while they were decreased for homebuyers with lower credit scores, such as those below 640. Another change: Your down payment will influence your fee. The higher your down payment, the lower your fees, which will still depend on your credit score. Fannie Mae provides the Loan-Level Price Adjustments on its website.

## Pros and Cons of Assumable Mortgages

Pros

*   Rate on the mortgage may be lower than current market rates
    
*   May not need to apply for a new mortgage
    
*   If seller's home equity is low, there are fewer out-of-pocket costs for the buyer
    

Cons

*   May need a substantial down payment when the seller's home equity is high
    
*   Lenders may not cooperate when a second mortgage is needed
    
*   With two mortgages, the risk of default increases
    

The [advantages of acquiring an assumable mortgage](https://www.investopedia.com/ask/answers/08/benefits-assumable-mortgage.asp) in a high interest rate environment are limited to the outstanding balance on the mortgage or the [home equity](https://www.investopedia.com/terms/h/home_equity.asp). For example, if you purchase a home for $350,000 and the seller's assumable mortgage only has a balance of $200,000, you'll need to make a [down payment](https://www.investopedia.com/terms/d/down_payment.asp) of $150,000 to cover the difference. Alternatively, you could get a separate mortgage to secure the additional funds.

Additionally, when the home's purchase price exceeds the mortgage balance by a significant amount, you'll need to obtain a new mortgage. Depending on your credit profile and current rates, the interest rate may be considerably higher than the assumed loan.

Usually, you'll take out a [second mortgage](https://www.investopedia.com/terms/s/secondmortgage.asp) on the existing mortgage balance if the seller’s home equity is high. You may have to take out the second loan with a different lender than the seller’s creditor, which could pose a problem if both lenders don't cooperate. Additionally, having two loans increases the risk of default, especially when one has a higher interest rate.

However, an assumable mortgage can be an attractive option if the seller's home equity is low. If the home's value is $350,000 and the assumable mortgage balance is $310,000, you'll only need to put down $40,000. If you have this amount in cash, you can pay the seller directly without having to secure another credit line.

## Assumable Mortgage Transfer Approval

The final decision over whether an assumable mortgage can be transferred isn't left to the buyer and seller. The original [mortgage lender](https://www.investopedia.com/how-to-find-the-best-mortgage-lender-5194993) must approve the assumption before either party can sign off on the deal. The homebuyer must apply for the assumable mortgage and meet the lender’s requirements, such as having sufficient assets and being creditworthy.

> **Fast Fact**
>
> If the mortgage is assumed by a third party, a seller is still responsible for debt payments unless the lender approves a release request, releasing the seller of all liabilities from the loan.

If approved, the property title is transferred to the buyer, who makes the required monthly repayments to the bank. If the lender doesn't approve the transfer, the seller must find another buyer willing to assume the mortgage who also has good credit.

A mortgage assumed by a third party doesn't relieve the seller of the debt payment. The seller may be liable for any defaults, which could affect their [credit rating](https://www.investopedia.com/terms/c/creditrating.asp). To avoid this, the seller must release their liability in writing at the time of assumption, and the lender must approve the release request.

## What Does Assumable Mean?

Assumable refers to when one party takes over another's obligation. In an assumable mortgage, the buyer assumes the seller's existing mortgage. When the mortgage is assumed, the seller is often no longer responsible for the debt.

## What Does Not Assumable Mean?

Not assumable means that the buyer cannot assume the existing mortgage from the seller. Conventional mortgages are non-assumable. Some [mortgages have non-assumable clauses](https://www.investopedia.com/terms/a/assumption_clause.asp), preventing buyers from assuming mortgages from the seller.

## Is an Assumable Mortgage Good?

When current interest rates are higher than an existing mortgage's rate, assuming a loan may be the favorable option. Additionally, there aren't as many costs due at closing. On the other hand, if the seller has a considerable amount of equity in the home, the buyer will either have to pay a large down payment or secure a second mortgage for the balance not covered by the existing mortgage.

## The Bottom Line

An assumable mortgage is worth considering when current mortgage rates are high, as closing costs are considerably lower than those of traditional mortgages. However, if the owner has a lot of equity in the home, the buyer may need to pay a substantial down payment or secure a new loan for the difference in the sale price and the existing mortgage. Plus, not all loans are assumable, and a buyer must still qualify with the agency and lender for those that are. If the benefits outweigh the risks, an assumable mortgage might be a good option for homeownership.

> **Article Sources**
>
> 1.  Cornell Law School: Legal Information Institute. "[Assumable Mortgage](https://www.law.cornell.edu/wex/assumable_mortgage)."
>     
> 2.  U.S. Department of Housing and Urban Development. "[Chapter 7. Assumptions](https://www.hud.gov/sites/documents/4155-1_7.pdf)," Pages 1–2.
>     
> 3.  United States Department of Agriculture. "[Chapter 2: Overview of Section 502](https://www.rd.usda.gov/files/3550-1chapter02.pdf)," Page 2.
>     
> 4.  U.S. Department of Veteran Affairs: Veterans Benefits Administration. "[Rights of VA Loan Borrowers: Important Notice](https://www.vba.va.gov/pubs/forms/26-8978.pdf)."
>     
> 5.  U.S. Department of Veteran Affairs: Veterans Benefits Administration. "[Processing Transfers of Ownership Under Valeri](https://www.benefits.va.gov/HOMELOANS/documents/circulars/26_08_3.pdf)," Page 2.
>     
> 6.  Fannie Mae. “[Loan-Level Price Adjustment Matrix](https://singlefamily.fanniemae.com/media/9391/display),” Page 2.