Homebuyers

Looking for a 3% Mortgage Rate? Consider an Assumable Mortgage

Remember when mortgage interest rates were under 3% just a few years ago? Wouldn’t it be great to get that rate today?

With mortgage rates averaging at more than 7%, a low interest rate on a home loan may feel like winning the lottery. But it’s possible with an assumable mortgage. An assumable mortgage is when you “assume” the seller’s existing loan and mortgage rate.

The rub is that only 23% of all mortgages were eligible to be assumed in 2024, according to Intercontinental Exchange. Most Conventional loans and other non-government loans don’t allow the practice.

And there are some big risks and financial downsides to assuming a home loan. Buyers generally must pay sellers out for the equity in the property, which can be a substantial amount.

“Is [a loan] assumable or is it practical to assume?” said Stephen Moye, a sales manager at New American Funding in San Diego. “That’s the distinction.”

In other words, just because a mortgage is eligible to be assumed doesn’t automatically mean it’s a good idea for you or the seller. But when it makes sense for both parties, you may be able to lock in a rate that’s significantly lower than current market rates.

Here’s what you need to know.

What is an assumable mortgage?

Assumable mortgages are a home loan where you take over the seller’s home loan and its interest rate, repayment term, and monthly payments.

These loans become more popular when mortgage rates are high, as buyers look for more affordable options. Generally, if the seller has a low rate on a government-backed mortgage, that rate could come with the loan if the buyer takes over the mortgage.

For the seller, an assumable loan may help to stir up interest in their property.

“If the listing agent knows that the seller has an assumable mortgage, they might use that as a selling point,” Moye said.

How do assumable mortgages work?

When assuming a mortgage loan, you must qualify the same way you would with any other mortgage.

The lender will review your credit and finances to make sure you meet the loan’s eligibility requirements. If your application is approved, you’ll assume responsibility for the mortgage while the terms generally stay the same.

So, how do you get an assumable mortgage? Look for it advertised in the listing. You may also want to ask the seller’s real estate agent whether the seller’s loan is eligible for assumption and if the seller is open to it.

Understand, though, that the timeline for assumable mortgages can be slow. A regular purchase loan typically closes in about three weeks in Moye’s area. But with an assumable mortgage, a long approval time pushes the closing date out much longer.

Which loans are eligible to be assumed?

Loans backed by the Federal Housing Administration (FHA), the U.S. Department of Veterans Affairs (VA) and the U.S. Department of Agriculture (USDA) may be assumed. Most Conventional loans aren’t eligible.

• FHA loans: FHA loans are assumable if the seller lived in the home as their primary residence and you generally plan to do the same.
• VA loans: Anyone who qualifies may assume a VA loan, whether they’re a veteran, service member, or surviving spouse.
• USDA loans: USDA loans may be assumable in rural areas but be aware the rate and terms may change.

Conventional loans typically aren’t assumable, with one exception: adjustable-rate Conventional loans.

“The fixed rates aren’t assumable, but the adjustable rates often are,” Moye said.

However, if the seller has an adjustable-rate mortgage (ARM), you probably wouldn’t be inheriting the low rate that makes an assumable loan attractive in the first place.

Risks of assumable mortgages

The biggest downside of an assumable mortgage is that you need to cover the difference between the home’s purchase price and the remaining balance on the mortgage. That’s the seller’s equity.

For example, if the seller owes $300,000 on the loan but the home is selling for $400,000, you’d need to come up with the $100,000 difference. You can pay it with cash or by financing it with a second mortgage at today’s mortgage rates.

On top of the equity gap, you may owe a funding fee. The fee on a VA loan is 0.5% of the loan balance at closing. In the above example, the fee would add $1,500 to your closing costs.

On an FHA loan, you could inherit the seller's monthly mortgage insurance premium. Depending on when the loan originated and how much the seller initially put down, you could be paying for it for the rest of the loan’s term.

Why sellers may be reluctant to allow a mortgage assumption

Sellers may worry about being responsible if the buyer stops paying on the mortgage. But they may be able to secure a formal release of liability on the loan to protect them.

With VA loans, entitlement is an understandable concern for many sellers. A VA loan uses part of the seller’s entitlement, which helps veterans buy with no down payment. This may not leave them with enough entitlement left over to purchase another home with a VA loan.

“If you have another vet that will assume the loan for you and can cover the difference, you’re good. You get your eligibility back,” Moye said.

A low rate can make an assumable mortgage appealing. But the option needs to make sense for your situation.

“[Is it] practical to assume is always the question,” Moye said.

Stephen Moye NMLS # 268619