What Is an Assumable Mortgage? Do I Have One?

When interest rates are high, assumable mortgages can attract home buyers. Assumable mortgages are mortgages where the buyer takes over the seller’s existing mortgage. 

That means the buyer doesn’t need to go through a bank to get approved for a mortgage. Instead, they take over the seller’s:

• Balance due
• Interest rate
• Repayment period

Is My Mortgage Assumable?

Not all mortgages are assumable — most conventional mortgages are not. Assumable mortgages are typically backed by one of these U.S. government agencies:

• Federal Housing Authority (FHA): The seller has to have used the property as their main residence for the loan to be assumable.
• Veterans Affairs (VA): A buyer doesn’t need to be a member of the military or a military spouse to qualify for an assumable VA mortgage.
• U.S. Department of Agriculture (USDA): These assumable mortgages may be available in rural areas. 

It’s not up to the seller to decide whether a buyer can assume a mortgage. The agency that provides the mortgage will check the buyer’s qualifications and approve or deny it.

How Does an Assumable Mortgage Work?

If a seller has a mortgage that qualifies, they can list the property for sale as “assumable.” That way, buyers know that they can take over the existing mortgage.

However, assuming the mortgage may not cover the entire purchase price of the house. Most sellers have equity in their home, too. 

For example, suppose a home is worth $500,000 and the balance due on the mortgage is $300,000. If the buyer assumes the mortgage, that covers $300,000 of the cost. The buyer still owes $200,000. They can pay the $200,000 difference as a down payment if they have funds, or they can take out a second mortgage. That second mortgage would not have the same interest rates and terms as the assumed mortgage.

Pros of an Assumable Mortgage

For the Seller

For the seller, an assumable mortgage can make the property easier to sell if current interest rates are higher than the interest rate on the mortgage. Sellers may also be able to get a higher price for the property, since buyers know they will be paying less interest.

For the Buyer

That lower interest rate is the main benefit of assumable mortgages for buyers. Assumable mortgages also have lower closing costs, and generally don’t require appraisals.

Cons of an Assumable Mortgage

For the Seller

Most assumable mortgages don’t have many downsides for the seller, as long as they’re done through the proper channels. If you make arrangements on your own for a buyer to assume your mortgage, you could be responsible if they default on payments.

VA loans can be a little tricky. Veterans who sell their home to non-veterans may not qualify for another VA loan right away. 

For the Buyer

For buyers, assumable loans may require large down payments or second mortgages that might have higher interest rates and closing costs. 

For FHA loans, mortgage insurance payments last for the life of the loan. To get rid of them, a buyer would need to refinance, and that could mean paying a higher interest rate.

Is an Assumable Mortgage Right for You?

Buying or selling a home is a major financial decision. You’ll need to consider all of the pros and cons. As a buyer, you’ll want to know how home ownership will impact your monthly expenses and your overall net worth. As a seller, you may need to decide how to spend or invest the money you take away from a home sale. 

Whatever side of the mortgage equation you’re on, a Farm Bureau financial advisor can help you understand the benefits and challenges so you can make the best decision for your family’s future. Reach out today to start the conversation.