Are Assumable Mortgages the Way to Beat High Interest Rates?

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Main takeaways

• Assumable mortgages let you take over a seller’s loan, often at a lower rate than today’s market.

• Certain government-backed loans, like FHA, VA and USDA, are assumable in most cases.

• If you find an assumable mortgage, you’ll still need to pass the lender’s credit check and cover the difference between the home’s sale price and the remaining loan balance.

• These loans are searchable on sites like Assumable, Roam, Realtor.com and Zillow.

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When mortgage rates are relatively high—and they’re still well above pandemic-era levels—the prospect of buying a new home is one that you might be inclined to put on hold.

In theory, assumable mortgages, which let you take over the seller’s existing loan, seem like the perfect solution. The trouble is that many loans can’t simply be transferred to a new borrower. That makes it critical to know how these mortgages work, and where to look for them.

What is an assumable mortgage?

An assumable mortgage is a home loan that enables the buyer to take over the seller's existing mortgage, with the outstanding balance, interest rate and terms staying the same. 

During periods when interest rates are relatively high, these loans offer the possibility to borrow at a lower rate than you’d get by taking out a brand new mortgage. And for sellers, advertising an assumable mortgage is a way to attract potential home buyers and get a leg up in a competitive market.

But there are some important caveats here. The buyer has to make up the difference between the home’s sale price and the mortgage balance. That means either coming up with enough cash to cover the gap or taking out a separate loan from a different lender.

Plus, the majority of loans can’t be assumed by the new home buyer. And even mortgage programs that allow such transfers require the buyer to meet certain eligibility criteria before taking on the current mortgage.

What are the rules for assumable mortgages?

Whether or not a home loan is assumable largely depends on the type of loan that the seller is paying off. Here are the rules for the most common types of mortgages:

Conventional Mortgages

Roughly four out of every five mortgages are backed by Fannie Mae and Freddie Mac, and these two giants set the rules for their loans. Most of these conventional mortgages have what’s called a “due-on-sale” clause that requires the full outstanding balance to be repaid when the home is sold. So if the seller has one, you probably can’t assume their mortgage. 

There are certain events that allow the buyer to assume even a conventional mortgage, however. These include cases where a family member inherits property from a deceased loved one or a couple goes through a divorce. If one spouse receives the home as part of a divorce settlement—thus forcing a change in ownership—the individual may be able to pay off the existing loan with the same interest rate and terms.

FHA Mortgages

Federal Housing Administration, or FHA, home loans are a popular option for homebuyers with lower credit scores or a low down payment. As with other home loans that are backed by a government agency, FHA mortgages are assumable in most cases.

Buyers still have to show they’re creditworthy, which means the lender will analyze your credit score and debt-to-income ratio so they’re confident that you can pay back the loan. But the application process is simpler than that of applying for a new loan. 

If the rate on the existing mortgage is better than the current prevailing rates, you could be saving some serious cash in the long run by taking this alternate path. Plus, you’ll be paying substantially less in closing costs. 

VA Mortgages

VA home loans have a number of unique features, including a zero down payment option, that make them an attractive option for active-duty service members and veterans. 

Mortgages insured by the U.S. Department of Veterans Affairs are assumable, as long as the lender or VA accept the creditworthiness of the home buyer. In order to transfer the mortgage, however, the seller has to get approval from the lender before selling their home. 

Finding a seller who’s willing to transfer their VA loan can be a challenge, though. That’s because their “full entitlement”—the ability to borrow with the VA’s no down payment provision—goes away when it’s a civilian who’s paying off their previous loan. A lot of sellers would rather not have their mortgage assumed, or only offer it to other veterans. 

USDA Mortgages

While not as common, you may come across homes in rural, or even some suburban areas, where the seller has a USDA mortgage. While this loan program isn’t as well known, it’s something of a hidden gem in the lending world. Available to low- and moderate-income home buyers, USDA loans require no down payment and have interest rates that are comparable, and sometimes lower, than conventional loans.

Like other government-backed mortgages, USDA loans can be assumed when the homeowner sells their home. But, here again, the buyer has to meet the credit requirements set by both the lender and the USDA before assuming the existing mortgage. 

The pros and cons of assumable mortgages

Assuming a mortgage can have a lot of advantages, but also certain drawbacks that you’ll want to be aware of beforehand. 

The pros

• When interest rates have risen, the assumed mortgage may come with a lower interest rate than a new loan would.

• The closing costs are usually considerably less than those on a new mortgage.

• In some cases, the loan origination process is faster than applying for a brand new mortgage.

The cons

• Most mortgages cannot be assumed when the home is sold; typically only government loan programs qualify.

• You’re responsible for paying the difference between the sale price of the home and the existing loan balance, which means you could be faced with a relatively large down payment.

• You still have to meet the lender’s credit requirements, which include a valid credit score and debt-to-income ratio.

Where can you find assumable mortgages?

Only about 6% of all consumer mortgages are even assumable, according to Realtor.com. But there are several websites that allow you to help identify properties where this feature is offered.

Assumable and Roam are among the sites that specialize in assumable mortgages, allowing you to shop properties at the zip code level. Even some of the larger real estate sites are making it easier to find them. 

For example, on Realtor.com you can click on the “More” tab to the right of the search options. Scroll down and type the word “assumable” into the keyword search box to see which properties are available in your area. The process is almost identical on Zillow, which also lets you filter assumable mortgages when you make use of the keyword feature. 

The upshot

If you can locate a property that comes with an assumable mortgage, you might save yourself a considerable amount of interest in the long run. But that doesn’t mean taking over the previous loan is always a great idea. If the home has substantially increased in value, you could have to make up the difference in cash or a pricy second loan.