The appeal of an assumption is the seller's interest rate. A loan taken out when rates were lower keeps that rate for the rest of its term, and the buyer who assumes it gets the same rate and the same remaining payment schedule. The price of that rate is cash: you pay the seller their equity, the gap between the sale price and the loan balance, at closing.
FHA assumptions
Every FHA loan is assumable, and HUD requires the buyer to be a creditworthy owner-occupant. The servicer reviews your credit, income and debts much as it would on a new FHA loan, and you have to live in the home as your primary residence. Investors can't assume FHA loans.
The seller's FHA mortgage insurance stays with the loan on its original schedule. If the seller put less than 10% down, the annual premium continues for the life of the loan, and the payment you take over already includes it.
VA assumptions
VA's law lets any buyer assume a VA loan, veteran or not, as long as the loan is current and the buyer qualifies on credit as if they were an eligible veteran. That includes VA's residual income test, the money left each month after the house payment, debts and family living costs.
The buyer pays a VA funding fee of 0.5% of the balance. On a $290,000 balance, that's $1,450.
Entitlement is the part sellers watch. When a non-veteran assumes the loan, the seller's VA entitlement stays tied to it until it's paid off, which can limit the seller's next VA purchase. When a veteran buyer assumes it and agrees to substitute their own entitlement, the seller's entitlement is restored.
A worked example: assume or start fresh
The numbers here are made up for illustration. Say a seller bought a $320,000 home four years before your offer, with an FHA loan at a hypothetical 3.25% rate. With 3.5% down and the upfront premium, the loan was $314,204, and principal and interest are $1,367.44 a month. After 48 payments, the balance is $287,768.24, with 312 payments left. You agree on a $345,000 price.
| Assume the seller's FHA loan | New FHA loan, 3.5% down | |
|---|---|---|
| Cash toward the price | $57,231.76 | $12,075.00 |
| Loan amount | $287,768.24 | $338,751.19 |
| Rate | 3.25% (example) | 5.75% |
| Principal and interest | $1,367.44 | $1,976.86 |
| Payments left | 312 | 360 |
The new FHA loan is the $332,925 base loan (96.5% of $345,000) plus the 1.75% upfront premium of $5,826.19. Assuming saves $609.42 a month in principal and interest, about $7,313 a year, and the loan pays off four years sooner. It takes $45,156.76 more cash at closing. With FHA 100% financing on a new loan instead, the cash toward the price would be $0.
If the equity gap is too big
- Look for sellers with more recent loans. A seller who bought two or three years ago has less equity, so the gap is smaller.
- Use proceeds from another sale. Buyers moving up often fund the gap from the home they're selling.
- Negotiate the price. Every dollar off the price comes straight off the gap, since the loan balance doesn't change.
- Run the new-loan option side by side. When the gap is out of reach, FHA 100% financing, or VA with $0 down for an eligible veteran, gets you into the same home with little cash, and you can refinance later.
Plan on more time than a regular purchase, because the seller's servicer handles the credit review instead of a lender working for you. Ask the listing agent for the servicer's assumption package early.
Put both loan amounts into the mortgage payment calculator to see the full payments with taxes and insurance. When you find a home with an assumable FHA or VA loan, call AAA Capital Funding at 888-601-8344 and we'll price the assumption against a new loan on the same house.