By Guest Kathy Morrow, Regional Vice President, V.I.P. Mortgage, Inc.

With increasing mortgage rates, buyers are looking for ways to afford homes.  A common solution is for the buyer and seller to consider a loan assumption. 

What is a loan assumption?  A loan assumption is an agreement between a lender, original borrower and a new borrower, where the new borrower agrees to assume responsibility for the debt owed by the original borrower.  “Great!” says the buyer, “I want to take advantage of the seller’s low interest rate.”  Before you assume a loan is assumable, do your homework.

Here are some questions to ask and steps to take:

• Ask the servicer what their process is and the timeframe from submitting an assumption package to “approval” and “closing”
• Ask if they have minimum credit score requirements
• Ask if they allow second mortgages for cash to assume the mortgage
• Will they require an appraisal or automated valuation model (AVM)?
• Will they allow a second home buyer or investor to assume?

Below are considerations for types of loans and whether they are generally assumable:

FHA Loans: Assumable ~ per FHA Guidelines “Mortgages subject to the 1989 Act require that the lender automatically prepare the release from liability, thereby releasing the original owner, when he/she sells by assumption to a creditworthy assumptor, who executes an agreement to assume and to pay the debt, thus becoming the substitute borrower….Only the current lender can execute the release of liability and is required to release all parties from liability when the assuming borrower is found creditworthy”. Reference: for information on processing a release of liability, see HUD 4155.1 7.1e 

VA Loans:  Assumable ~ There is a significant difference with the assumption of a VA loan as the original loan could only be obtained with a Certificate of Eligibility (COE) specific to the eligible veteran or active military.  Veterans are urged to seek council as their COE may be at stake. If another veteran assumes the loan and uses their COE to substitute the original veteran’s COE, the original veteran should be able to reuse their COE in the future. However, if the lender allows a civilian to assume the loan, the original veteran’s certificate remains in place as a guarantee on the loan and the original veteran may not be able to purchase another home with a VA loan.  Additionally, the original veteran’s certificate would be at risk if the assumed loan were to go into default before the loan is paid in full. 

USDA Loans: Assumable ~ USDA will require prior approval of the assumption. The seller must not be in default on their payments in order for the loan to qualify for assumption. Generally, the debt will be adjusted by reamortizing the loan with new rates and terms unless the assumption is for family members who are exchanging the title of the property.

CONVENTIONAL Loans: Loans backed by Fannie Mae (FNMA) and Freddie Mac (FHLMC) are generally not assumable because they contain a “due on sale” clause. However, exceptions may be allowed for adjustable rate mortgages. It is believed that Fannie Mae does not approve assumptions if a subordinate lien is in place but it is suggested that everyone consult with the servicer of their loan as to their specific options.

Remember that if a loan assumption is an option, the buyer may need to have a larger sum of money to put down on the purchase of the property to cover the difference between the amount owed on the loan and the equity.  Additionally, the original borrower will need to ensure a “Release from Liability” is obtained so that the original borrower will not have future liability for the loan.

Finally, don’t confuse assumptions with wraps or seller carry backs as they are very different. Assumptions have guidelines and requirements for the original borrower, the new borrower as well as the lender/servicer.

Guest contact information:

Kathy Morrow, Regional Vice President  V.I.P. Mortgage, Inc.
NMLS #204395
Ph. 928 848 7889
kathy@morrow.team