The Assumable Mortgage – Is It the Right Move for You?

In a typical home buying scenario, the purchaser works with a lender to obtain financing for their dream home through a mortgage. In certain situations, assuming a mortgage is a better option. Assumable mortgages can save you a great deal of money during the buying process and beyond.

What Is an Assumable Mortgage?

An assumable mortgage is a special type of financing that allows a buyer to “take over” the seller’s existing mortgage and all of the terms that come with it, such as interest rates, the current balance, and repayment period.

Which Types of Mortgages Are Assumable?

The loans that most often qualify for assumption are VA and FHA loans, which are backed by the federal government. Under some specific circumstances conventional mortgages may also be assumable, but the majority of those loans are ineligible for assumption.

How Do Assumable Mortgages Work?

With an assumable mortgage, you take over payments and other responsibilities on the home according to the same exact mortgage terms — including the interest rate and monthly payments — which can be significantly lower than the current rates and terms available for new mortgages.

In other words, you may save tens of thousands of dollars on an assumed mortgage since you’re effectively grandfathered in to what could be more favorable terms secured when the original loan was obtained. To illustrate these savings, let’s take a look at an example case.

In the right circumstances, your buyer could save tens of thousands of dollars on an assumed mortgage since they’re effectively grandfathered in on what could be more favorable terms secured when the original loan was obtained. Given this unique benefit, you could potentially leverage that savings to justify a higher asking price for your home.

To illustrate the savings and benefits of this unique transaction, let’s explore an example scenario below from the buyer’s perspective.

Saving Money with an Assumable Mortgage

Let’s say Susan wishes to assume the mortgage on a $225,000 home and the current balance is $200,000. This means Susan can take over payments on the remaining $200,000 and fully enjoy the original terms allotted to the assumed mortgage. Susan will only need to secure an additional loan at a current interest rate to cover the $25,000 difference, or pay the difference in cash, similar to a traditional down payment.

Here is how these financial scenarios break down:

FHA Mortgage: A 30-year FHA loan for $225,000 with a fixed interest rate of 5% will result in monthly payments of $1,207.85 and a total cost of $434,826 over the life of the mortgage.

Assumable Mortgage: Assumption of a 30-year FHA loan 10 years in, with a remaining principal balance of $200,000 at the original interest rate of 2.3% results in a monthly payment of $769.60 and a loan cost of $277,056, paid over 20 years. A separate 30-year loan to cover the $25,000 difference (at 5%) results in a monthly payment of $134.21 and a total loan cost of $48,315.60.

	Conventional Mortgage	Assumable Mortgage + additional mortgage to make up the difference	Savings From Assumption
Principal	$225,000	$225,000 = $200,000 + $25,000	n/a
Interest Rate	5%	2.3% and 5%	n/a
Monthly Payment(s)	$1,208	$903.81 = $769.60 + $134.21	$304.19
Total Loan Cost	$434,826	$325,371.60 = $277,056 + $48,315.60	$109,454.40

*Note: Example above does not include mortgage insurance. Mortgage Insurance (MI) may change depending on the LTV, ask your loan officer for more information.

Both monthly payments, including the assumable mortgage and additional loan, will total $903.81, saving Susan $304.19 a month, and a tremendous total of $109,454.40 over the life of the loan!

It is also worth noting that the less equity a seller has in their home, the more attractive an assumable mortgage may become to a buyer. For instance, if that same $225,000 loan had a $210,000 unpaid balance, you’d only be responsible for the $15,000 difference, which could be an even greater savings.

FHA Assumable Mortgage Requirements

Federal Housing Authority (FHA) loans qualify for assumption because they are free from the restrictions of “Due on Sale” clauses that are common in conventional mortgages.

Buyers wishing to assume an FHA mortgage must have a minimum credit score of 620, although buyers with scores above 580 may be eligible with additional restrictions. Similar to a conventional loan, your debt-to-income ratio including the assumed loan’s payment, cannot exceed 43% (though in special circumstances it can go as high as 50%).

VA Mortgage Requirements (not just for veterans)

The United States Department of Veterans Affairs has long offered one of the best home loan programs available for veterans and their dependents.

VA loan assumption requirements include:

• Meeting the VA standards for creditworthiness and income
• Assumption of all mortgage obligations, up to and including the obligation to repay the VA if you should default on the loan
• A “funding fee” equal to 0.5% of the current loan balance (only the principal amount)

Buyers who are VA-eligible (meaning that you would otherwise qualify for a VA home loan but prefer to assume the mortgage of a veteran), may trade their eligibility to purchase the home for the seller’s eligibility. However, those individuals should first consult with their lender to identify any potential liability issues.

Want to know more about VA mortgages? Get the bigger picture about the special rates and other beneficial considerations made for loans to U.S. veterans.

All mortgage payments must be current at the time of closing. You should plan to provide funds necessary to clear any outstanding payments before you can assume the loan. Either the buyer or seller can bring the loan to good standing.

VA also allows select individuals to assume a mortgage through an exempt transfer (these are permissible transfers that occur due to a death, divorce, or transfer to a spouse, child or permissible trust).

How to Assume a Mortgage in 6 Steps

While assuming a mortgage can be easier and much less time-consuming than taking out a new mortgage it is important to know what to expect during the process. We put together a list of key steps to follow when assuming a mortgage:

1) Do Your Research

Before you put time and effort into the process, be sure the home loan you wish to assume qualifies. Also, plan to speak to the original lender and ensure they’re onboard with the assumption — the seller may not have all the pertinent info or a full understanding of the process and requirements. You may also want to consult with a real estate professional or an attorney.

Conventional loans are not typically assumable via third party purchase of the property, but interest in the property can be transferred to an approved individual below through a permissible aka exempt transfer. Persons who acquire the property through a permissible transfer and are confirmed as a successor in interest, are not required to assume a loan to make payments or access the account. However, if they wish to assume the loan for any reason they would be permitted to do so as long as they qualify to assume the mortgage.

Examples of permissible transfers:

• As a result of the death of a co-owner of the property (so long as both parties were on title when the original loan was taken out or the transfer was previously approved)
• As a result of the death of a relative
• As a result of divorce or legal separation
• A transfer of the property (or, if the borrower is an inter vivos revocable trust, a transfer of a beneficial interest in the trust) to: the spouse, child(ren), parent(s), brother(s) or sister(s), grandparent(s), or grandchild(ren) of the borrower (or, in the case of an inter vivos revocable trust borrower, of the individual who established the trust), as long as the transferee occupies the property

Note: For all such transfers affecting mortgage loans purchased or securitized by Fannie Mae on or after June 1, 2016, the transferee is not required to occupy the property.

2) Know the Fees

Although assuming a mortgage often costs less than obtaining your own loan, there are still certain fees that need to be considered. Depending on your state, you can expect to pay between $1,000 and $1,500 for title and escrow fees, recording, credit report inquiries, and other incidental costs.

Assumable mortgages also may have an ‘assumption’ fee, but, not to worry, that amount is capped for both FHA ($900) and VA (.5% of the loan) loans. In the rarer case of assuming a conventional loan (often one that’s been passed down by a family member), the mortgage assumption fee may be higher — up to 1% of the total loan amount.

3) Secure the Down Payment

The less equity the owner has in the home, the less your down payment will be. You’ll need a strategy to come up with the down payment, and many buyers may still need to obtain an additional mortgage to cover the total home price, using their savings or non-traditional financing measures.

4) Get Lender Approval

The seller does not have the final say on whether or not you’re able to assume their mortgage; that decision lies solely with the original lender. You’ll need to fill out an assumption packet, which will include a loan application, credit authorization, verification of income, an identity affidavit, and other forms you’ll need to sign.

You will also need to provide financial information, such as:

• Pay stubs for the past 30 days
• W-2 forms for the past two years
• Bank statements for the past 60 days
• Property tax statements for the home you’re hoping to purchase
• Homeowners insurance
• Tax returns for the last two years, if you are self-employed

If you end up borrowing from more than one lender to complete the mortgage assumption, be sure that each lender is informed of all loan activity for the home. Different lenders may require slightly different information so prepare ahead of time for varying requests during the financial evaluation process.

During this time, be sure to keep all of your documentation readily accessible so you can promptly answer any follow-up questions your lender should have.

5) Sign on the Dotted Line

Congratulations! The lender has approved your mortgage assumption. Now it’s time to finalize the paperwork.

You and the seller will both sign a mortgage assumption agreement. (You can actually do this before you get the final decision in order to save time, but make sure it’s contingent on the lender’s approval.)

You may also be asked to sign a document releasing the seller’s liability on the mortgage. This protects them from being held responsible for any part of the loan moving forward.

6) Attend the Closing, and Get the Keys!

Closing on your new home is a time for celebration — and of course, providing more signatures. Be sure you read and understand all the documents set in front of you; if you have any questions, now is your last chance to ask.

Happily, closing costs are typically much lower for an assumed mortgage than for a traditional one. Use the savings for a nice dinner and enjoy your new home!

Special Circumstances for Assuming a Mortgage

Can I Assume the Mortgage if a Loved One Has Passed Away?

In the unfortunate circumstance of a loved one passing, assuming the mortgage may be useful if you wish to keep their home within your family.

According to the Consumer Financial Protection Bureau, in some cases you may not be subject to the Ability-to-Repay (ABR) rule that requires lenders to ensure you have the financial means to keep the house that was willed to you, or that you otherwise have rights to as a “successor in interest.”

This interpretive rule allows you the same rights the original borrower had, including the right to negate the “Due on Sale” clause (often associated with a conventional mortgage) and go through the proper channels to assume the mortgage.

FHA allows select individuals to assume a mortgage through an exempt transfer without credit qualification.

Examples of exempt transfers:

• As a result of the death of a co-owner of the property (so long as both parties were on title when the original loan was taken out or the transfer was previously approved)
• As a result of the death of a relative
• As a result of divorce or legal separation
• A transfer of the property (or, if the borrower is an inter vivos revocable trust, a transfer of a beneficial interest in the trust) to: the spouse, child(ren), parent(s), brother(s) or sister(s), grandparent(s), or grandchild(ren) of the borrower (or, in the case of an inter vivos revocable trust borrower, of the individual who established the trust), as long as the transferee occupies the property

Exempt Transfers require assumer to be confirmed a Successor in Interest and the assumer will need to provide a clear copy of their Driver's License and Social Security Card, 6 months of consecutive bank statements showing payment made in a timely manner from a bank account in their name only, Recorded QuitClaim Deed, and Homeowner's Insurance Policy showing the Successor in Interest as sole insured. If unable to provide 6 months of bank statements the assumer can go through a qualified assumption that requires a loan application and full credit underwriting (income, credit, asset analysis).

VA allows select individuals to assume a mortgage through an exempt transfer. Exempt Transfer due to death of a sole borrower requires assumer to be confirmed a Successor in Interest and the assumer will need to provide a clear copy of their Driver's License and Social Security Card, Recorded QuitClaim Deed, and Homeowner’s Insurance Policy showing the Successor in Interest as sole insured. Please note that individuals who are confirmed as a successor in interest are not required to assume a loan in order to live in the property or make payments on the loan. However, the property is still subject to the loan and, payments would need to be made to the loan in good standing. If the loan is not kept in good standing it could affect your ownership in the property.

If a Divorce Necessitates a Division of Assets, Can I Assume the Mortgage?

Yes. If you have recently finalized a divorce or received an order for separation, one party or the other may have been awarded the family home. Assuming a mortgage is one means of shifting the responsibility of the payments, but again, the lender is not legally obligated to do so.

In such a case, if you’re the one keeping the home, and you wish to assume the liability of your former spouse, you would need to qualify to assume the mortgage under your income and credit score alone or by showing six months of timely payments made by you alone.

Once you assume the mortgage, the party who will no longer reside in the home can be released from all liability, if approved by the lender and the proper paperwork has been completed.

FHA allows select individuals to assume a mortgage through an exempt transfer. You would first need to go through our confirmation of successor in interest process.

Assumptions under an exempt transfer such as divorce can bypass credit qualification if you can prove you have made 6 months of consecutive payments on the loan; this requires 6 months of consecutive bank statements showing payments made timely for the mortgage in the awarded party's name only, final divorce decree, recorded QuitClaim Deed, and Homeowner's Insurance Policy reflecting the awarded party's name. If the awarded party is not on the loan they will need to provide a clear copy of their Driver's License and Social Security Card. If unable to provide the 6 months of bank statements and/or the recorded QuitClaim Deed, the awarded party will be required to go through a qualified assumption which consists of a loan application and full credit underwriting (income, credit, and asset analysis).

VA allows select individuals to assume a mortgage through an exempt transfer.

Exempt Transfer due to Divorce

Veteran who was awarded the property through the divorce and the one that used their entitlement to secure the loan must provide the documents below to be able to go through an Exempt Transfer:

• Final Divorce Decree
• Recorded Quit Claim Deed
• Homeowner's Insurance policy reflecting awarded party as sole insured

Can I Assume a Mortgage That’s Currently in Foreclosure?

Yes. Facing foreclosure is stressful, and a homeowner may want to do anything and everything to prevent it — and allowing another party to assume the mortgage is an option.

However, the buyer will need to reinstate the loan, also described as “paying off the past due amount before the assumption can go through.” Buyers may accomplish this by bringing in cash or taking out a 2nd loan.

If it’s a Fannie Mae loan in question, the servicer will review the current borrower’s financial packet to determine if they can afford the payments on the mortgage. Each investor or insurer will have specific requirements around what is required to complete the assumption.

If you’re set on the property as your dream home, the default amount isn’t unreasonable, and if the interest rate for the assumption is right, then it can be worth the extra cost and effort to secure the loan.

Pros and Cons to Assumable Mortgages

There are plenty of reasons to assume a mortgage: namely, lower interest rates, more favorable terms, and lower (or non-existent) closing costs. You may be able to close on the home sooner, you won’t need to obtain your own mortgage for the full cost, and if you’re buying a home with low equity, you may be able to avoid taking out a separate mortgage at all.

As long as the loan qualifies for assumption, the drawbacks are minimal. The most common issue is simply clearing up debt incurred by any mortgage payments missed by the previous borrower.

Does a Mortgage Assumption Make Good Financial Sense?

Assuming a mortgage can be an attractive option for buyers who don’t want to (or can’t) secure their own mortgage, as well as those who want to take advantage of the savings that come with a lower-interest loan.

But before assuming a mortgage, be sure you consider the pros and cons of your situation, and carefully examine your own finances before proceeding. It’s important that you understand the debt and obligations you will take on if you do so. And while FHA and VA mortgages are inherently assumable, each version still comes with particular requirements and qualifications.

Whether you have a conventional mortgage, a VA or FHA loan, an assumable mortgage, or other, Pennymac is here to help! Talk to a Pennymac Loan Expert and get BuyerReady Certified today!

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