Buying a House and Keeping the 3% Rate: Assumable Mortgages Explained

An assumable mortgage allows a homebuyer to take over the seller’s home loan – and importantly, keep the original mortgage rate. Mortgage assumption can be one way for buyers to save money while interest rates are high, and it can help sellers stand apart from the competition by offering a more affordable home loan.

If this sounds too good to be true, there is a catch: The loan amount on the assumed mortgage typically won’t cover the agreed-upon purchase price, which means the buyer may have to make up the difference in cash. Plus, only certain types of government-backed loans are assumable, and it may be difficult to find a seller who is willing to take on the additional risk of transferring their mortgage while closing the sale. All things considered, mortgage assumption is relatively uncommon, but not impossible.

Here’s what to know about assumable mortgages, including how they work and where to find one.

Mortgage assumption is when a home seller transfers their mortgage to the person buying their home. The terms of the loan stay the same, including the mortgage rate, loan amount and monthly payment.

The process of buying a home with an assumable mortgage is fairly similar to buying any other home. It begins when the buyer enters a purchase contract with a seller – only instead of a traditional financing clause, there will be a mortgage assumption clause detailing the agreement. As part of the contract, the buyer agrees to pay the difference between the outstanding mortgage balance and the home’s purchase price, also known as the assumption gap.

Take this example: Let’s say the seller purchased the home for $400,000 three years ago, and they paid their mortgage down by $25,000. On top of that, the home appreciated by $50,000, so the sales price is now $450,000. Since the outstanding mortgage balance is $375,000, the buyer would need to cover an assumption gap of $75,000.

Additionally, mortgage assumption is subject to credit approval, much like with a traditional home loan.

“Even if the seller offers an assumable mortgage, the buyer of that property has to qualify for that mortgage,” says George Ratiu, chief economist of Keeping Current Matters, a real estate insights and analytics company. “The lender will look at credit scores, income and the full picture as if that person were applying for a loan.”

Government-backed loans are the only types of mortgages that allow for assumption in most cases, and the eligibility criteria can vary. For example, the minimum credit score needed for a standard Federal Housing Administration loan is 580, but you may need a credit score of at least 620 to qualify for an FHA loan assumption.

If the lender doesn’t approve the buyer’s application for assumption, the purchase contract could be terminated and the buyer’s earnest money deposit will be returned. For the seller, that could mean re-listing the home and finding a new buyer.

If all goes as planned and the lender approves the application, responsibility for the mortgage can transferred from the seller’s name to the buyer’s. Notwithstanding other hiccups (such as major problems found during the home inspection), the purchase agreement can be executed and the sale finalized during closing.

Most mortgages, including conventional conforming loans and jumbo loans, aren’t assumable. Some conventional loans have assumption clauses for exceptional circumstances, such as the death of a spouse – but that doesn’t apply to homebuyers who are seeking an assumable mortgage.

Only certain types of government-backed mortgages – FHA loans, Department of Veterans Affairs loans and rural home loans through the U.S. Department of Agriculture – have an assumption clause that can be applied toward home sales. Assumable government-backed loans make up about 18% to 20% of the mortgage market, Ratiu says. But not all sellers are willing to go through the somewhat risky process of mortgage assumption, which further limits their availability.

“Current market conditions don’t necessarily play in the favor of buyers when it comes to assumable mortgages, because for most sellers there’s enough demand,” Ratiu says. “Unless the seller is really hard-pressed, then they might use that assumable mortgage as an extra incentive.”

Since they’re fairly uncommon, one of the biggest roadblocks to getting an assumable mortgage is simply finding one. You can start by asking your real estate agent to focus on finding homes for sale with assumable mortgages, or you can search yourself on real estate platforms like Redfin, Zillow and Realtor.com by targeting keywords like “assumable mortgage,” “FHA loan” and “VA loan.”

But not every seller will indicate in the listing that their mortgage is assumable. If you’re not sure, just ask the listing agent.

→ Lower mortgage rates. Buyers may benefit from assuming a mortgage with a much lower interest rate than what’s currently available, especially if the loan was originated or refinanced in recent years when rates were at historic lows of around 3%. By comparison, mortgage rates have been hovering in the 6.5% to 7% range during the first half of 2023.

→ Capped closing costs. The lender won’t typically require a home appraisal, which can save time and money at closing. Plus, other closing costs are capped on some types of government-backed mortgages. For example, the VA prohibits lenders from charging more than 1% of the loan amount for origination fees.

→ Added incentive for buyers. A seller can make their home more appealing by offering the opportunity for buyers to lock in a low rate, especially when rates are high. An assumable mortgage can help set the seller’s listing apart from the rest if they’re having trouble finding a buyer.

→ Military service not required. A buyer can assume a seller’s VA loan even if they haven’t served in the military. VA loan entitlement is tied to the loan itself, not the borrower.

→ The assumption gap. The remaining loan amount on an assumable mortgage may not cover the agreed-upon purchase price, so the buyer will be responsible for paying the difference. “In some cases, the buyer can take a second mortgage if they don’t have the cash, but otherwise there is a very significant cash contribution that must be brought upfront,” Ratiu says. Even if the buyer can find secondary financing on the open market, they’d have to go through the entire application and underwriting process, including a home appraisal – offsetting a key benefit of assuming the primary mortgage.

→ Increased risk for seller. The buyer needs to meet the lender’s credit and income requirements, which is an added risk that could delay closing (or even cause the deal to fall through) if the lender denies the buyer’s application. Plus, the seller needs to read the legal agreements carefully to ensure their name is fully removed from the mortgage during the transfer. “Sometimes, sellers can still be on the hook in case the buyer fails to make payments down the road,” Ratiu says.

→ No choice of lender. By assuming a mortgage through the seller’s lender, the buyer is unable to shop around and choose a lender based on other factors.

→ Loss of VA entitlement. Selling a home with a VA-backed mortgage assumption means sacrificing that VA loan entitlement. In other words, you won’t be able to borrow another VA loan until the assumed loan is paid off.

Mortgage assumption is a legitimate way to buy a home at a low rate, especially if you have sufficient cash reserves to cover the assumption gap. But keep in mind that finding an assumable mortgage should be a secondary concern. After all, you’re buying the house itself, not the loan associated with it.

“Focus on the house that’s going to be your home,” says Ratiu. “As a buyer, instead of worrying about finding an assumable mortgage, understand that what you’re really finding is a home.”