Mortgage Loan Assumption – Decoded in 6 Key Rules

January 3, 2024
Steve Silver
Mortgage News, Mortgage Refinance, Mortgage Types

Mortgage Loan Assumption At a Glance

Mortgage Loan assumption lets a buyer take over the existing mortgage
Government-backed loans offer more flexible assumption options
Conventional fixed-rate loans rarely permit assumptions
Adjustable-rate mortgages may become assumable
Non-sale inheritance transfers can bypass qualification checks
Verify specifics with the lender before agreeing to assumption terms

Mortgage loan assumption refers to a home buyer taking over the existing mortgage attached to the property instead of needing to take out a new loan. Whether mortgage assumption is possible depends on loan type, lender policies, and buyer qualifications. This guide breaks down critical factors across various mortgages.

Government-backed mortgages, including those insured by the Federal Housing Administration (FHA), guaranteed by Veterans Affairs (VA), and originated by the United States Department of Agriculture (USDA), tend to have more flexible mortgage loan assumption privileges than conventional loans. However, specific criteria still apply.

FHA Loans

FHA mortgages are generally types of mortgages that are assumable, provided the new borrower meets all FHA loan requirements. This typically includes a minimum 3.5% down payment, a 580 credit score, acceptable debt-to-income ratios, and other standards.

Seller approval is also required; they can’t be delinquent on payments. The lender charges a small assumption fee.

VA Loans

VA loans have perhaps the most liberal mortgage loan assumption policies. A VA mortgage loan is an assumable mortgage. Both veterans and non-veteran buyers can assume them without lender pre-approval.

Inherited VA loans don’t even require a credit check. Closing costs and fees apply to record the loan’s legal transfer. Ensure all VA entitlement and county loan limits are satisfactory.

USDA Loans

For a USDA mortgage loan that is a loan assumption prospect, the property must be in an eligible rural area, the seller can’t be delinquent, and the buyer should meet all income and credit specifications. There may also be a 1% loan assumption fee.

Check if the home appraises for enough to support the remaining mortgage balance.

Conventional Fixed-Rate Mortgages

Conventional fixed-rate mortgages are typically not types of mortgages that are assumable. The lender won’t allow a transfer of interest rate and terms to another borrower.

Rare exceptions include post-2008 “relo” FRMs that explicitly permit assumptions by qualified buyers.

Conventional Adjustable-Rate Mortgages

Adjustable-rate mortgages that have passed the initial fixed period are sometimes assumable, contingent upon forfeiting the option to convert to a fixed rate later. The new buyer takes responsibility for future rate fluctuations. Certain modified conventional loans under the Home Affordable Refinance Program (HARP) prohibit assumptions.

Beneficiaries and Trusts

If a home transfers to a beneficiary without a sale, the mortgage can usually be assumed without standard buyer credit/income checks. This applies to family inheritances and living trust transfers to named beneficiaries after the trustor dies.

Consult a probate attorney to ensure proper documentation and confirm if lender approval is still required despite no title exchange for value.

Mortgage Loan Assumption Key Takeaways

Assumability varies greatly across loan types – verify directly with the lender.
For a buyer to take an assumable loan, the buyer will be required to meet minimum standards.
Additional assumption fees and closing costs may apply.
Consult professionals, given many variables for specific mortgage loan assumption situations.

Contact Steve Silver at Silver Mortgage at 1-800-920-5720.