What is an Assumable Mortgage?

With mortgage rates above 6%, the topic of loan assumption has drawn much more attention. American Banker reports a 67% increase in assumptions between 2022 and 2023. Assumable mortgages offer the opportunity to transfer the previous owner's favorable loan terms, including the interest rate and remaining time on the loan to the qualified buyer often resulting in substantial savings on interest and a lower monthly payment. While this option still isn't widely utilized, it provides a valuable opportunity for homeownership with lower borrowing costs. However, not all mortgages are assumable, and it often requires the buyer to have enough cash to cover the seller's home equity. Here's a breakdown of what you should understand about assumable mortgages. 

The main attraction of an assumable loan is the ability to secure a rate lower than what you would get with a new mortgage. Government-backed loans are generally the only mortgages eligible to be assumed (VA, FHA, USDA). Fannie Mae and Freddie Mac loans are usually ineligible. Assumable mortgages aren’t the best option for all buyers. Depending on how much a local market has appreciated, the buyer may need a larger amount of cash available to pay the seller the difference between the assumable mortgage balance and the sale price of the home. Other factors to consider include a longer timeline to close, lower numbers of government-backed mortgages in certain markets, and the challenge of identifying them without the proper tools or assistance. 

The general concept of how it works is fairly simple: Instead of taking out a new home loan to purchase a home, the buyer submits an application to assume the seller’s existing mortgage through the seller's lender. This would still include a credit check and income verification. If approved, the buyer keeps the original interest rate, the number of payments left on the mortgage, and the remaining loan balance. However, no other costs can be added or rolled into the assumed loan balance. Meaning the buyer will be responsible for coming up with the funds to pay closing costs (sellers can still provide a credit towards this) and any cash difference between the loan balance and the agreed upon sale price of the home. It is important to consider this potential equity gap early on to decide how large of a gap you can afford and to form a plan for how you will pay it. Depending on the location, some homes may have appreciated a great deal since last purchased or refinanced resulting in a much larger equity gap while others may have appreciated very little or not at all which is ideal if you do not have much cash to put towards it.