With mortgage rates topping 6% for the first time in more than a decade, buyers are looking for any angle to save on borrowing costs. One potential option? Ask the seller to transfer their mortgage along with the house.
Loan assumptions, as they're called, allow you to take over an existing home loan instead of applying for a new one. Assuming a lower-interest mortgage could potentially save you hundreds of dollars every month.
For example, in Woodbridge, VA, a spacious three-bedroom, two-bath townhome listed on Zillow for just under $350,000 is advertising an "assumable VA Loan with a 2.25% interest rate to those that qualify." If you take over the mortgage at that rate, your monthly payment would be about $1,540.
Now, let's imagine that the mortgage assumption was off the table — and you plan to secure a traditional 30-year, fixed-rate mortgage to pay for the home. Using a mortgage calculator and setting the interest rate to 6.340% (the average APR at the time of this writing), your monthly payment would rise to about $2,210. This assumes you put down 20% and took out a mortgage for the remaining $280,000.
By taking over the seller's existing mortgage, you'd save nearly $700 monthly just on interest.
Monthly payment on an assumable vs. new home loan
|New home loan
Assumable mortgages used to be commonplace. However, when mortgage rates spiked during the 1970–80s, most lenders started eliminating assumable mortgages and made "repayment on sale" a mandatory feature of conventional home loans — presumably to get a higher return on their lending.
Today, mortgage assumptions are still permissible with government-insured VA and FHA loans, which make up about 20% of all home loans. However, they're far from commonplace. Multiple realtors and mortgage professionals we contacted for this piece had never seen one done.
For one thing, interest rates have been on a fairly steady decline for the past few decades, reaching historic lows in 2021. With ever-more affordable rates on offer, assuming a previous owner's mortgage didn't make financial sense.
Now, as interest rates climb back above 6%, curiosity about loan assumptions is also surging. Google Trends shows that searches for the term "loan assumption" hit peak popularity at the start of September.
"We’re seeing increased interest," says Chris Birk, vice president of mortgage insight at Veterans United Home Loans, "but it’s unclear whether that interest will ultimately translate into more assumptions."
Indeed, just because an assumable loan is on offer doesn't necessarily mean it will pan out.
Challenges associated with a mortgage assumption
One of the greatest obstacles with a mortgage assumption is that, just like in a traditional home sale, the seller will need to be compensated for the full purchase amount, minus what they still owe, at closing.
"If the loan balance is significantly less than the purchase price," says Eric Jeanette, founder and president of FHA Lenders, "it could mean having to come to the table with a much larger down payment."
Given that the median home value has risen by $100,000 over the past two years, you may also need to pay the seller a significant amount of appreciation on top of their original purchase price.
Here's an example. Say a seller has paid off half of a $400,000 mortgage on a home worth $500,000 due to appreciation. You'll need to come up with a minimum of $300,000 at closing.
That said, many VA loans come with a zero down payment requirement. FHA loans also come with low down payment options. Depending on how long the seller has been in the house, you still might find an assumable loan with a manageable down payment, even after factoring in the local rate of appreciation.
Even if the down payment required to take over a loan far exceeds your personal savings, you still have options for making up the difference — including taking out a second mortgage.
"Buyers would want to talk with lenders and banks about whether a second mortgage or a personal loan might be feasible," says Birk, who notes that "the lender or servicer allowing the assumption would factor that new debt into the buyer’s credit and underwriting profile."
Of course, your interest rate on a second mortgage loan would be subject to current market conditions. However, depending on what your total monthly payment ends up being, pursuing a second loan — even at a higher interest rate — may still be worthwhile.
Getting help from a relative, former relative, or godparent may also be an option for coming up with more cash at closing — especially now that Fannie Mae has expanded its list of permissible sources of tax-free gifts to assist with a down payment.
Another major consideration, particularly for a VA loan assumption, is that the seller's VA entitlement will stay with the loan until it's paid off in full. As a buyer, this means you don't need to be a veteran to assume a VA loan. However, it presents a significant downside for the seller.
"Veterans without their full entitlement may have diminished zero-down buying power for their next home purchase or, in some cases, lack sufficient entitlement to reuse the VA loan benefit at all," says Birk. In that case, they'd need to be comfortable applying for a conventional mortgage on their next home or find another qualifying VA borrower to take over with their own entitlement.
One of the greatest advantages of a VA loan is that you can put as little as zero money down. However, if the seller has enough equity in their home to make a significant down payment on a new one, it may not be an issue. And some sellers may not be interested in buying again right away.
A quick Zillow search reveals hundreds of properties across the country advertising assumable loans in the property details.
Since homes are sitting on the market significantly longer than they were a year ago, sellers may be willing to forego the benefits of a new VA loan to secure a buyer — especially if they're on a tight-selling timeline.
If the stars align on a property that interests you, and you can assume a low-interest loan with a significant balance, you could be in for substantial savings.
How to qualify for a loan assumption
To assume someone else's mortgage, you'll need to be able to cover the difference between the asking price and loan balance and meet borrowing requirements set by both the lender and mortgage insurer — whether it's the VA or FHA.
According to Veterans United, buyers must pay a 0.5% funding fee to assume a VA loan. This is on par with typical loan origination fees, which run 0.5–1%.
You'll also need to pay traditional closing costs, which can run 2–5% of the home's value. However, you may save a bit of money on an appraisal, which typically isn't required with a loan assumption.
Finally, the seller will need to obtain a release of liability from their lender, essentially pardoning them from any responsibility should you default on the loan in the future.