An assumable mortgage is a loan that can pass from the seller to the buyer along with the house. The buyer takes over the remaining balance, the interest rate and the months left on the term. FHA and VA loans are assumable, as long as the buyer qualifies with the company servicing the loan.
The appeal is the rate. A seller who financed when rates were lower can hand that rate to you, and the payment can come in well under a new loan on the same price.
How FHA and VA assumptions work
FHA. The buyer goes through a credit and income review much like a new FHA approval, and the home has to be the buyer's primary residence. Once approved, the seller can be released from liability, so a later missed payment isn't on their record.
VA. The servicer, and in some cases VA, approves the buyer's credit and income. The buyer pays a VA funding fee of 0.5% of the balance assumed, unless exempt. Anyone can assume a VA loan, veteran or not, but that choice decides what happens to the seller's entitlement, the VA guarantee that lets a veteran buy with $0 down.
- Veteran buyer who substitutes entitlement. The buyer's entitlement replaces the seller's in the same amount, and VA restores the seller's entitlement for a future home.
- Non-veteran buyer, or a veteran who doesn't substitute. The seller's entitlement stays tied up until the loan is paid off. The seller may still have remaining entitlement, but it's smaller.
Sellers who are veterans often ask about this first, so expect it in the negotiation.
A worked example: the equity gap
Every assumption has a gap between the price and the balance. You take over the loan, and you pay the seller the rest.
A home sells for $350,000. The seller took out a VA loan years ago at a lower rate, and in this example it has $240,000 left with a principal and interest payment of $1,140 a month.
- Equity gap the buyer must cover: $350,000 − $240,000 = $110,000
- VA assumption funding fee: 0.5% × $240,000 = $1,200
- New FHA loan on the same home with 3.5% down: base loan $337,750, or $343,660.63 with upfront MIP
- New FHA principal and interest at a 5.75% rate: $2,005.51 a month
The assumption saves $865.51 a month in principal and interest, and it needs $110,000 plus the $1,200 fee at the table instead of a $12,250 down payment. That trade decides most assumption deals.
Closing the gap
The gap is paid in cash, gift funds from family, or second financing that the servicer approves. Buyers with a large gift or proceeds from a home sale are the ones who usually assume. When the gap is too large, a new FHA, VA or Conventional loan with a small down payment is the faster route, and a seller credit toward your closing costs can still lower your cash.
Ask your agent whether a listing has an FHA or VA loan and what the balance is before you write the offer. Assumptions run through the servicer and can take longer than a new loan, so build extra days into the contract.
Compare both paths in the mortgage payment calculator. To weigh an assumption against a new loan on a home you're looking at, call AAA Capital Funding at 888-601-8344.