Assumable Mortgages: What Buyers and Sellers Need to Know
Assumable Mortgages Sound Amazing. Here’s What TikTok Isn’t Telling You.
I was watching a TikTok Live recently where assumable mortgages were being presented as an incredible homebuying affordability hack.
The basic pitch was pretty simple:
“Why get a mortgage at today’s interest rates when you can just assume the seller’s 3% mortgage?”
And I’m sitting there thinking...
Ma’am. We are leaving out several chapters. 😂
Don’t get me wrong. An assumable mortgage can be an incredible opportunity for the right buyer and seller. But seeing “3% assumable mortgage” in a listing does not automatically mean you can purchase that home with a 3% mortgage and call it a day.
There are some pretty important details we need to talk about first.
What Is an Assumable Mortgage?
An assumable mortgage allows a qualified buyer to take over, or “assume,” the seller’s existing mortgage rather than obtaining an entirely new first mortgage.
That means the buyer may be able to take over the seller’s remaining loan balance with the existing interest rate and other applicable loan terms.
When current mortgage rates are considerably higher than the seller’s existing rate, you can see why that sounds pretty attractive.
But there’s one very important phrase in that explanation:
Remaining loan balance.
You are assuming the mortgage balance. You are not assuming the purchase price of the house.
And that brings us to the part of the TikTok conversation that tends to get a whole lot less exciting.
Let’s Talk About the Equity Gap
Let’s say you find a home listed for $500,000.
The seller has an assumable mortgage with a fantastic 3% interest rate.
Wonderful.
But the seller only owes $250,000 on that mortgage.
The buyer may be able to assume the $250,000 existing loan.
But the house still costs $500,000.
So...
Where are we getting the other $250,000?
Welcome to the equity gap.
Unfortunately, we cannot pay that with good vibes.
The buyer still needs a way to cover the difference between the purchase price and the mortgage being assumed. Depending on the transaction, that could mean bringing a substantial amount of cash to closing or finding secondary financing that is permitted and actually available for the transaction.
And that second option isn't necessarily as simple as saying, “I'll just get another loan for the difference.”
Availability, loan guidelines, qualification requirements, combined payments, and the terms of the assumed mortgage all matter.
Suddenly, that “just assume their 3% mortgage!” TikTok sounds a little different.
Yes, You Still Have to Qualify
Another common misconception is that an assumable mortgage means simply taking over someone's mortgage payments.
That's not how an approved mortgage assumption works.
The buyer generally needs to qualify for the assumption according to the applicable loan and program requirements.
Income matters.
Credit matters.
Debt-to-income ratio can matter.
The buyer's ability to repay the mortgage matters.
An assumption isn't a loophole around mortgage qualification.
VA Loan Assumptions Have Another Important Consideration
VA loans can be assumable, and that can create an incredible opportunity when a seller has a low-rate VA mortgage.
But if you're the Veteran selling the home, there is another conversation that absolutely needs to happen before you agree to an assumption:
Your VA entitlement.
Two concepts frequently get mixed together when people discuss VA assumptions:
Release of liability and restoration of entitlement.
They are not the same thing.
With a properly approved assumption and release of liability, the original borrower can be released from personal responsibility for the mortgage obligation.
But that does not automatically mean the Veteran's VA entitlement is restored.
Depending on who assumes the loan and whether eligible VA entitlement is substituted, the original Veteran's entitlement may remain tied to that mortgage until the loan is paid off.
That could affect how much VA entitlement the Veteran has available if they want to purchase another home using VA financing.
What Happens If the New Buyer Defaults?
This is where the distinction between liability and entitlement becomes especially important.
If the original Veteran received the appropriate release of liability, they generally are not personally responsible for the assuming borrower's future mortgage payments simply because they originally had the loan.
However, if the original Veteran's VA entitlement remains tied to the assumed mortgage and the new borrower later defaults, resulting in a loss to the VA, restoration of that entitlement can be affected.
That is a pretty significant detail to understand before agreeing to let someone assume your VA mortgage.
“Someone else takes over my loan” and “I get all of my VA entitlement back” are not automatically the same thing.
So, Are Assumable Mortgages a Good Idea?
They absolutely can be.
Imagine being able to purchase a home and take over a significantly lower interest rate than you could obtain with a new mortgage today. Depending on the loan balance, purchase price and buyer's financial situation, the savings could be substantial.
But an assumable mortgage should be evaluated as an entire transaction, not just an interest rate.
Before getting excited about an assumable mortgage, I want to know:
What is the purchase price?
What is the remaining assumable loan balance?
How large is the equity gap?
How will the buyer cover that gap?
Is secondary financing available and permitted?
Does the buyer qualify for the assumption?
What will the buyer's total monthly housing expense actually be?
If it's a VA loan, what happens to the seller's entitlement?
Will the seller receive a release of liability?
Now we can determine whether that 3% assumable mortgage is actually a great opportunity for this particular buyer and seller.
That's mortgage strategy.
The Interest Rate Is Only One Piece of the Puzzle
One of the reasons I love being a mortgage broker is that there usually isn't one universal “best” mortgage.
The right financing depends on the borrower, property, available loan programs, long-term plans and overall transaction.
An assumable mortgage might be fantastic.
A traditional mortgage might make more sense.
There may be another financing strategy you haven't considered yet.
That's why I would much rather look at the entire picture than make a decision based on one exciting number in a property listing.
And maybe one last thing:
TikTok is fantastic for recipes, book recommendations and watching other people organize their refrigerators.
When it comes to one of the largest financial transactions of your life, you might want to make sure the person giving you mortgage advice actually works in mortgages. 😂
Have you found a home with an assumable mortgage?
Before you decide whether the existing interest rate makes it a great deal, let's look at the numbers.
Welcome Home Loans can help you evaluate your financing options and understand what the transaction could actually look like for you.
There’s more than one way home.