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Buying a home with an affordable payment at a time of relatively higher interest rates may seem like a difficult, or even impossible, goal. But what if there were a way to buy a home and keep the seller’s existing mortgage with its lower rate and payment?
There is, in fact, a way to do exactly that. It’s called a “mortgage assumption.” All you have to do is find a seller with an assumable mortgage — and there are a lot of them — and then take over that loan when you buy the seller’s home.
Once the paperwork is signed, you’ll be responsible for the loan as if you were the seller, with the same rate, payment, balance owed, and repayment schedule.
Read more: How to buy a house in 2024
An assumable mortgage is any mortgage that can be transferred from one borrower to another.
Assumable mortgages tend to be attractive when interest rates for new loans are higher than rates were for most earlier loans. Assumptions can also prove useful when a loan is transferred due to a divorce or inheritance.
Conventional mortgages typically aren’t assumable, but most government-backed mortgages are. The government-backed category of assumable loans includes:
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FHA loans, insured by the Federal Housing Administration.
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VA loans, guaranteed by the U.S. Department of Veterans Affairs.
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USDA loans, guaranteed by the U.S. Department of Agriculture.
Learn more: Government home loans — Definitions, types, and requirements
There’s no fast and easy way to locate all the homes with assumable mortgages in a particular area, but a few strategies could help you identify these homes one by one.
One strategy is to search for-sale home websites for related keywords, like “assumable” or “assume,” or types of assumable mortgages, such as “FHA,” “VA,” or “USDA.” Some for-sale homes are advertised online with offers like: “2.5% Fully Assumable mortgage!” “ASSUMABLE MORTGAGE at 4.625%!!” or simply “ASSUMABLE MORTGAGE.”
Another strategy is to ask your Realtor to help you. Your Realtor can search additional listings, research national mortgage data, ask other Realtors about their sellers’ mortgages, send letters to homeowners in areas where you want to live, or even knock on doors in those neighborhoods to try to locate current or prospective sellers who may not even know they have an assumable mortgage. Sellers who aren’t sure can contact their lender or loan servicer for this information.
A strategy that’s not likely to work is to ask a loan representative or mortgage broker to find homes with assumable mortgages for you. Loan professionals are compensated for selling new mortgages, not finding old ones to transfer to new borrowers.
Read more: Is now a good time to buy a house?
Assuming a seller’s mortgage isn’t easy, but it could save you thousands of dollars in mortgage interest expense compared with the payment for a new mortgage.
1. Complete a loan application. To assume an existing mortgage, you’ll need to apply and be approved, as you would for any other home loan.
While it is possible to pay someone else’s mortgage without the lender’s approval, the seller is unlikely to agree to this approach, because without the lender’s approval, the seller will remain financially responsible for the mortgage payment, and the lender may demand repayment of the full loan amount.
2. Make a larger cash down payment or arrange for a second mortgage to finance the difference between the home’s sale price and the amount the seller still owes on the assumable mortgage.
FHA, VA, and USDA loans generally allow very small or even 0% down payments, which may make closing the gap with cash or secondary financing easier.
A second mortgage will likely have a higher rate than the assumable mortgage, but the combined payments for both mortgages should still be lower than the payment for a new mortgage for the combined loan amount.
3. Pay any loan fees and closing costs. A home purchase with an assumable mortgage may have lower closing costs than one with a new mortgage; however, the costs typically won’t be zeroed out, especially if you need a second loan to finance the full sale price.
One more thing to consider: If the assumable mortgage has an escrow (or impound) account for property tax and insurance, those funds will likely remain with the mortgage rather than be refunded to the seller. The buyer and seller will need to negotiate whether either of them will provide the other a credit for all of part of those funds at closing.
Finding a for-sale house you like with an assumable mortgage that makes sense for you may take some time, but it could pay off with big savings on your mortgage payment for years to come.
While every buyer’s situation is different, assumable mortgages often require large down payments. When you assume a homeowner’s mortgage, your down payment must cover the difference in the home value and the owner’s outstanding loan balance. For example, if the sales price is $500,000 and the owner still owes $375,000, you’ll need a $125,000 down payment to make up the difference.
One downside of an assumable mortgage is that you’ll likely need a large down payment. Assumable mortgages also aren’t very common, so finding a loan officer with substantial experience in this area can be difficult.
Yes, banks and other mortgage lenders still allow you to assume a mortgage, though it isn’t as common as it once was. You also cannot assume a conventional mortgage — you’re limited to government-backed loans.