Many people finance their home purchase with a conventional loan from a bank or private lender. Unlike an FHA loan, conventional loans allow more freedom with the property. However, these loan agreements also tend to include higher interest rates and larger down payment requirements. 

Are you selling your house before you’re finished paying off a conventional mortgage loan? Are conventional loans assumable? Mortgage Champions answers this ever-important question below as Houston’s top mortgage broker.

What Does Assumable Mean?

An assumable mortgage is a type of mortgage loan that the initial borrower can transfer to the next person who purchases their home. The debt and obligations of the existing mortgage will fall to a new buyer after the original borrower sells the house. 

In other words, a new buyer can ‘assume’ responsibility for repaying the mortgage loan after they officially own the house.

Are Conventional Loans Assumable?

In short no, conventional loans will not fall under the assumable category. The original borrower cannot transfer their ownership of the loan to someone else when they sell the house. They’ll still have to pay off the loan, even after they relinquish ownership of the house and no longer live in it.

Typically, a conventional loan is not assumable because it contains clauses that allow the lender to fully collect the loan amount when the borrower sells the home. No homebuyer wants to buy a property and then immediately receive a bill from a lender for that same amount.

Still, there are certain conventional loans that the lender will deem as assumable. For example, adjustable rate mortgages from Fannie Mae are assumable. However, these loans remove the option for the buyer to convert the adjustable rate to a fixed rate. 

What Kinds of Loans Are Assumable?

Below are the most common types of mortgages that lenders will make assumable.

FHA Loans

Federal Housing Authority loans are one of the most common types of housing loans that are assumable, but only when both parties are eligible for FHA loans. For an FHA loan to be assumable, the owners must live in the property as a primary residence and have the right credit scores. The lender can transfer ownership of the loan once the owner sells the house. 

VA Loans

Department of Veterans Affairs home loans are available to qualifying veterans and their spouses. VA housing loans can be assumable, even if the buying party is not a veteran. 

Note that any VA loans issued before March 1, 1988, are freely assumable, and the buyer doesn’t need VA approval. However, loans made after March 1, 1988, require VA approval to transfer out. 

USDA Loans

The government offers USDA loans to help farmers finance rural land purchases. These loan options are attractive because they often have low interest rates and a 0% down payment. 

If a USDA loan is going to be assumable, the new buyer must meet all credit and eligibility requirements and receive approval from the USDA. However, if the original borrower was delinquent with payments, a new buyer cannot assume the loan, even if they meet credit and financial eligibility requirements. 

Assumable Loan Approval

The buyer and seller don’t determine whether government or conventional loans are assumable. The lending institution will look at the two parties and determine whether the buyer assuming the loan increases the lender’s risk or not.

• Once the lending institution approves the assumable loan, the owner can transfer the property title to the new buyer. 
• If the lender does not approve, the seller needs to find another buyer that is eligible. 
• Most lenders will charge an additional assumption fee as part of closing costs.  

It is also important to note that after assuming the loan, the original borrower might still be on the hook for specific fees, such as late payment fees. Any unpaid fees could negatively affect the original borrower’s credit score, too.

Advantages of Assumable Loans

Assumable loans are most advantageous for buyers when the interest rates are favorable. For example, property buyers operating in a high-interest economy will have to pay back hefty amounts of interest over the years. So, an assumable loan should only be attractive to homebuyers when the interest rates on it are lower than what the market is currently offering. 

If the homebuyer were to apply for a mortgage loan themselves, they would pay higher interest on this loan compared to the old one you want them to assume responsibility for. Taking on someone else’s mortgage and paying a lower interest portion could save a lot of money in the long run.

Assumable loans may offer someone a locked-in lower interest rate that will lower the overall cost of buying a home. It’s worth it, even if the new buyer has to make a large down payment or apply for a second mortgage to cover the shortfall.

How Can I Tell If My Mortgage Is Assumable?

If your mortgage is an FHA loan, VA loan, or USDA loan, it should generally be assumable. Loans from private lenders and conventional bank loans are typically not assumable. However, whether or not a specific loan is assumable ultimately comes down to the judgment of the lender. 

Is an Assumable Mortgage a Good Idea?

It depends on your specific financial situation. Assuming a mortgage might be a good idea if any of the below are true about you:

• You don’t want to get a mortgage at current interest rates. 
• You have enough liquid assets to make a larger down payment on a house.
• You don’t need a specific lender.
• You are willing to take out a second mortgage. 

In contrast, you should not get an assumable mortgage if any of the below apply. 

• You can’t make a large down payment.
• You don’t want a federally backed loan.
• You want to receive a fixed-rate loan. 
• You can’t meet conventional loan requirements.