Assumable Mortgages

Step 1: Find an Assumable Loan

• Look for properties with existing FHA or VA loans
• Check listing details or ask listing agent
• Verify the current interest rate and remaining balance
• Most assumable loans are from 2020-2022 (low rate period)

Step 2: Calculate the Numbers

• Purchase Price: $500,000 (example)
• Existing Loan Balance: $350,000 at 3.5%
• Gap (Your Down Payment): $150,000
• You need cash for the gap between purchase price and loan balance

Step 3: Finance the Gap (If Needed)

If you don't have enough cash for the full gap, options include:

• Second Mortgage: Finance the gap with a second loan (higher rate but still saves money overall)
• Seller Financing: Negotiate with seller to carry a second note
• Larger Down Payment: Bring more cash to reduce second mortgage needed
• Gift Funds: Use gifts from family members (if allowed)

Step 4: Apply for Assumption

• Contact the current lender (servicer) holding the mortgage
• Submit assumption application package
• Undergo credit and income review (must qualify)
• Provide standard loan documentation

Step 5: Lender Approval

• Lender reviews your creditworthiness
• Must meet current qualification standards
• Property appraisal may be required
• Approval typically takes 30-60 days

Step 6: Closing

• Close on the assumption
• Pay assumption fee (FHA: ~$900, VA: ~$300)
• Take over the existing loan terms
• Make future payments directly to the lender

• Assumability: All FHA loans are assumable with lender approval
• Qualification: Buyer must meet FHA credit and income requirements
• MIP Continues: Existing mortgage insurance premium continues (cannot be removed via assumption)
• Assumption Fee: Approximately $900
• Seller Release: Seller remains liable unless formally released by FHA (requires buyer qualification)
• Credit Score: Typically need 580+ credit score
• DTI Requirements: Must meet FHA debt-to-income ratios

• Assumability: All VA loans are assumable
• By Veterans: If buyer is an eligible veteran, they can substitute their entitlement and release seller's entitlement
• By Non-Veterans: Non-veterans can assume VA loans, but seller's entitlement remains tied up until loan is paid off
• Assumption Fee: Approximately $300 (0.5% of loan balance)
• Qualification Required: Buyer must qualify creditworthiness even if non-veteran
• Seller Consideration: Veterans should prefer veteran buyers to restore their full VA benefits
• Funding Fee: 0.5% of outstanding balance

• Generally NOT Assumable: Most conventional loans have "due-on-sale" clauses
• Exceptions: Some older conventional loans or special circumstances
• Fannie/Freddie: Standard conforming loans are not assumable
• Portfolio Loans: Some portfolio lenders may allow assumptions (rare)
• Bottom Line: Don't count on assuming conventional loans

• Assumable: USDA loans are assumable with lender/USDA approval
• Property Eligibility: Property must still be in USDA-eligible area
• Income Limits: Buyer must meet USDA income limits at time of assumption
• Less Common: Fewer USDA loans in existence, so less common to find

Credit Requirements

• FHA: Minimum 580 credit score (580-619 requires manual underwriting)
• VA: Lender sets minimum (typically 620+), but can be lower with compensating factors
• Good credit history with limited derogatory marks
• Must explain any credit issues

Income & Employment

• Stable employment history (typically 2 years)
• Sufficient income to support the assumed payment plus other debts
• Meet debt-to-income ratio requirements (typically 43-50%)
• Provide pay stubs, W-2s, tax returns

Down Payment/Equity

• Must have funds to cover the gap (purchase price - loan balance)
• Can combine cash with second mortgage
• Funds must be verified and sourced
• Gift funds may be allowed (program-dependent)

Property Requirements

• Property must be your primary residence (for FHA/VA)
• Property must meet current condition standards
• Appraisal may be required

Second Mortgage Basics

• Purpose: Finance the difference between purchase price and assumable loan
• Position: Second lien position (behind the assumed first mortgage)
• Interest Rate: Higher than first mortgage (8-11% currently typical)
• Term: Usually 15-20 years
• Payment: Separate payment in addition to assumed first mortgage

Example Scenario

Purchase Price: $500,000
Assumable First Mortgage: $350,000 at 3.5%
Your Down Payment: $75,000 (15%)
Second Mortgage Needed: $75,000 at 9.5%

Monthly Payments:

• First Mortgage: $1,572/month (P&I on $350k at 3.5%)
• Second Mortgage: $785/month (P&I on $75k at 9.5% for 15 years)
• Total: $2,357/month

Compare to New Loan at 7%:

• New Loan Amount: $425,000 at 7%
• Monthly Payment: $2,826
• Monthly Savings: $469
• 30-Year Savings: ~$169,000

Benefits to Sellers

• Attract More Buyers: Stand out in listings with "assumable low-rate loan"
• Potentially Higher Price: Buyers may pay premium for rate savings
• Faster Sale: Motivated buyers seeking rate savings
• Competitive Edge: Differentiate from other listings

Seller Risks & Concerns

• Liability: You may remain liable on loan until buyer is formally approved and you're released
• VA Entitlement: If VA loan, your entitlement is tied up unless buyer is also a veteran who substitutes their entitlement
• Longer Process: Assumptions take longer than cash or conventional financing
• Buyer Qualification: Not all buyers will qualify for the assumption
• Release of Liability: Must ensure lender formally releases you from the loan obligation

Marketing Your Assumable Loan

• Highlight in listing: "Assumable 3.5% FHA Loan"
• Calculate and advertise buyer's potential savings
• Provide loan details upfront (balance, rate, payment)
• Work with agent experienced in loan assumptions
• Contact your lender early to understand their assumption process

Challenge #1: Large Gap to Finance

Problem: Buyer doesn't have enough cash for the gap between price and loan balance.

Solutions:

• Obtain a second mortgage to finance part of the gap
• Negotiate seller financing for the gap
• Lower the purchase price
• Increase down payment (borrow from retirement, family gifts, etc.)

Challenge #2: Seller Won't Be Released from Liability

Problem: Lender won't release seller from the loan, leaving them liable.

Solutions:

• Ensure buyer has excellent credit to satisfy lender
• For VA loans, seek veteran buyer who can substitute entitlement
• Seller may need to accept remaining on the hook (rare but possible)
• Negotiate higher price to compensate seller for the risk

Challenge #3: Lender is Slow to Process

Problem: Many lenders are unfamiliar with assumptions and process slowly.

Solutions:

• Contact lender immediately upon contract acceptance
• Submit complete application package upfront
• Follow up regularly to keep process moving
• Build in extra time in purchase contract (60 days instead of 30)
• Work with experienced mortgage professional (like me!) who knows the process

Challenge #4: Finding Assumable Loans

Problem: Not many sellers advertise their loans are assumable.

Solutions:

• Ask listing agents about existing financing
• Look for homes purchased in 2020-2022 (likely low rates)
• Search MLS for "assumable" or "FHA" or "VA" in listing remarks
• Work with buyer's agent who understands assumptions
• Contact me - I can help identify assumable loan opportunities

Challenge #5: Buyer Doesn't Qualify

Problem: Buyer's credit or income doesn't meet lender standards.

Solutions:

• Work on credit improvement before applying
• Reduce debts to improve DTI ratio
• Add co-borrower with income/credit
• Increase down payment to lower DTI
• Consider manual underwriting if close to qualifying

✅ Consider an Assumption If:

• You found a property with an FHA or VA loan at significantly lower rate than current market
• You have cash (or can obtain second mortgage) to cover the gap
• You meet the qualification requirements (credit, income, employment)
• You're willing to wait 30-60 days for processing
• The monthly and lifetime savings justify the complexity
• You plan to stay in the home long-term (to maximize savings)
• You're working with experienced professionals who understand assumptions

❌ An Assumption May Not Work If:

• You don't have funds to cover the gap (and can't get second mortgage)
• You need a quick closing (assumptions take longer)
• The existing rate isn't significantly better than current rates
• You don't meet the qualification requirements
• The seller won't cooperate with the assumption process
• The property has a conventional loan (not assumable)
• The complexity and time outweigh the savings for your situation

Scenario 1: Perfect Assumption

Property: $600,000 home
Existing FHA Loan: $400,000 at 3.25%
Buyer Down Payment: $200,000 (33%)
Monthly Payment: $1,741 (P&I) + MIP
vs. New Loan at 7%: $2,661 (P&I)
Monthly Savings: $920
30-Year Savings: $331,200

Result: ✅ Excellent assumption opportunity!

Scenario 2: Assumption with Second Mortgage

Property: $500,000 home
Existing VA Loan: $380,000 at 2.875%
Buyer Down Payment: $50,000 (10%)
Second Mortgage Needed: $70,000 at 9.5% (15-year)
First Mortgage Payment: $1,576
Second Mortgage Payment: $731
Total Payment: $2,307
vs. New Loan at 7% ($450k): $2,994
Monthly Savings: $687
15-Year Savings: $123,660 (even with higher second mortgage!)

Result: ✅ Still saves money despite second mortgage

Scenario 3: Assumption Doesn't Make Sense

Property: $400,000 home
Existing FHA Loan: $350,000 at 6.5%
Current Market Rate: 7.0%
Buyer Down Payment: $50,000
Monthly Savings: Only ~$100/month
Result: ❌ Small savings don't justify complexity; get new loan instead