House hunting can easily turn into house fever, especially as home prices keep rising and you keep losing bidding wars on the houses you want. The desire to finally own your own home can drive you to some creative decisions, especially around mortgages, which can be challenging in the best of times. When you crunch those numbers on affording your dream home, you might look at current interest rates (hovering close to 7% at the time of this writing) and then look (longingly) at a decade ago—the average mortgage rate in May 2013 was just 3.35%.
If only you could use a time machine to buy your house eleven years ago! And then someone tells you that you can time travel to that lower rate: All you need to do is assume someone’s mortgage, and it might seem like a magical solution to your house-hunting blues. But there are plenty of downsides to an assumed mortgage that make it unlikely to be a wise decision.
How do you assume a mortgage?
Assuming a mortgage is a simple concept: You take over an existing mortgage, agreeing to make the monthly payments (including escrow payments) at the same terms and interest rate. The seller signs the title of the house over to you, you pay them any difference between the home’s value and the loan balance, and bam! You own a house and have a mortgage with the interest rate of a much happier time.
For example, let’s say you find a house that’s being sold for $300,000. The seller has an existing mortgage with a 4% rate and a $200,000 balance. You pay the seller $100,000, you pay some fees to the lender, and you assume the mortgage, maintaining the 4% rate.
There are two basic versions of assumable mortgages:
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Simple assumption is a private arrangement between the buyer and the seller that doesn’t involve the lender. The seller remains officially responsible for the loan, but the buyer makes the payments and takes the home’s title. If the buyer defaults, both the buyer and the seller are on the hook, because the lender didn’t approve the assumption.
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Novation-based assumptions are more official, and require the lender to approve the buyer for the loan and officially change the debt over to them. These require more paperwork, but the seller is completely released from responsibility for the debt.
And assumed loans are getting more popular: In 2022, 2,221 Federal Housing Administration (FHA) loans and 308 Veterans Administration (VA) loans were assumed; in 2023, 3,825 FHA loans and 2,244 VA loans were assumed—and we’re on pace to break both those marks by end of 2024.
And this can work, yes. If any new mortgage you qualified for would come with a 6% or 7% rate, you could save yourself a lot of money over the course of owning that home. If it was that simple, it would be a no-brainer. But its rarely that simple, for a long list of reasons.
The downsides to assuming a mortgage
Trying to assume a mortgage comes with a lot of potential downsides:
Finding one. Your first problem is going to be finding a mortgage you can assume, because the majority of conventional mortgage loans can’t be. Generally only government-backed loans from the FHA, VA, or the United States Department of Agriculture (USDA) are assumable. These loans make up roughly one-fourth of the mortgages in existence, so you’re already boxed out of 75% of the possible homes you could buy this way.
Strict criteria. If you do identify a loan that has the right mix of sale price, loan balance, interest rate, and government-backing, your next problem is going to be the strict criteria involved (unless you’re doing a simple assumption). In a novation assumption, you have to apply to the lender just as you would when originating a mortgage. Each government agency has its own set of requirements, including minimum credit scores and requirements that the house be the seller’s primary residence.
No shopping around. When assuming a mortgage, you are locked in to the existing lender. You can’t go to another bank to get a better deal, and you can’t negotiate any of the terms—you just assume them as-is. You’ll need to be sure that every aspect of the loan works for you, and get comfortable not being able to choose the financial institution you work with.
Costs. If we return to the example of buying a $300,000 house by assuming a mortgage with a $200,000 balance, you’ll have to come up with $100,000 to make the seller whole, so you’re either going to pay cash or you’ll need a second mortgage—which means you dilute the benefit of your low interest rate. Plus, there’s usually a loan assumption fee involved. The VA will charge 0.5% of the remaining mortgage balance, for example.
If you’re doing a simple assumption with a family member or very close friend that you trust completely, assuming a mortgage can be a way to own a home with a lower interest rate and less trouble than getting a new loan. Otherwise, assuming a mortgage is rarely going to be your best option, even if the rate is good.
