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Julia Kagan is a financial/consumer journalist and former senior editor, personal finance, of Investopedia.
Updated March 26, 2024 Reviewed by Reviewed by Doretha ClemonDoretha Clemons, Ph.D., MBA, PMP, has been a corporate IT executive and professor for 34 years. She is an adjunct professor at Connecticut State Colleges & Universities, Maryville University, and Indiana Wesleyan University. She is a Real Estate Investor and principal at Bruised Reed Housing Real Estate Trust, and a State of Connecticut Home Improvement License holder.
Fact checked by Fact checked by Suzanne KvilhaugSuzanne is a content marketer, writer, and fact-checker. She holds a Bachelor of Science in Finance degree from Bridgewater State University and helps develop content strategies for financial brands.
An assumption clause is a provision in a mortgage contract that allows the seller of a home to pass responsibility for the existing mortgage to the buyer of the property. In other words, the new homeowner assumes the existing mortgage and—along with it—ownership of the property that secures the loan. The buyer must typically meet credit and other qualifications and the guidelines for assumption clauses may vary by loan type.
If the interest rate on an existing mortgage is lower than current market rates, an assumption clause becomes an attractive selling point. Also, the buyer can avoid many closing costs, though there are some fees involved in assumptions. Some of the costs will include a title search, document stamps, and taxes.
For most homeowners, the benefits of an assumption clause are theoretical because conventional mortgages generally prohibit the practice. Banks frown on assumption clauses because they write mortgages based on the creditworthiness of the original borrower, not an unknown later buyer.
The new owner's ability to repay may be challenging to evaluate, and the bank may be reluctant to take on their risk. Moreover, even if a bank were to approve the creditworthiness of a new borrower, it would lose out on the down payment and closing costs incurred with a brand-new mortgage.
Lenders can review the buyer's debt-to-income ratio, monthly or annual income, assets, and other financial details as part of the assumable mortgage approval process.
As it is rarely in a bank’s interest to allow assumptions, most mortgages include a due-on-sale clause, which demands repayment of the remaining balance when the property sells. The bank won't sign off on its lien until the mortgage is paid, making the sale impossible for buyers who are unable to pay what's due.
However, assumption clauses are standard in government-backed mortgages from the Federal Housing Administration (FHA), the Veterans Administration (VA), and the U.S. Department of Agriculture (USDA). The new owner must still meet credit and eligibility standards.
Though FHA, VA, and USDA loans can allow for assumption clauses, the closing date of the original loan can determine what restrictions apply or what requirements buyers need to meet.
If you have an opportunity to assume someone else's mortgage loan, it's important to consider the advantages and potential disadvantages of exercising an assumption clause.
Though these types of loans still exist, they may be more difficult to find or to qualify for versus taking out a brand-new mortgage loan. It could also be to your advantage to weigh your options with the best mortgage lenders for getting a new home loan to purchase a property if you're ready to buy.
Assumption clauses can make the process of buying a home more streamlined and convenient. It may take less time to close on the loan, and the buyer may be getting a mortgage with an interest rate that's below the average current market rate.
Additional money may be saved if the buyer is able to pay less out of pocket toward the loan's down payment or closing costs. If there's no need for an appraisal or home inspection, that's even more money a buyer could save.
An assumption clause could also benefit a home's seller if it makes it easier for them to get out of the mortgage and unload the property. For example, if a member of the military is stationed overseas and their family is going along with them, they may have a pressing need to sell their home quickly. A VA loan with an assumption clause could allow them to do that.
Assumption clauses can be problematic in the case of VA loans. That's because of something called entitlements, which are tied to the VA guarantee in case of borrower default. If someone has a VA loan and then allows another buyer to assume it, that could affect their entitlement and their ability to qualify for another VA loan.
Buyers can also be at a disadvantage if the loan they're assuming has built-in private mortgage insurance premiums, as is the case with FHA loans.
The only way to remove mortgage insurance premiums from some FHA loans—that is, if your down payment was less than 10% and your loan originated after July 3, 2013—is to refinance into a non-FHA product.
If the interest rate on the new loan is higher than the loan they assumed, the buyer might not realize much in the way of savings simply by removing the mortgage insurance premiums.
Imagine a person who wants to assume the mortgage of a seller who has a 30-year, $240,000 mortgage at 3.5%, on which they have made payments for five years. The remaining balance, including interest, is about $323,300, and 25 years are remaining on the original note.
Closing costs typically run between 2% and 5% of a home's purchase price when choosing a traditional mortgage option to buy.
Assuming the current market interest rate is 4% and the new buyer takes out a 30-year fixed-rate mortgage for the same $240,000 loan, the balance due (with interest) at the end of that time would be about $412,500. Also, the new buyer would need to submit a lump-sum down payment to the financing institution.
By assuming the seller’s existing mortgage, the buyer would save about $89,000 over the term of the loan. Also, there are five fewer years of payment obligation with the assumption-clause loan. Any lump-sum payment would be given to the seller to offset the equity they have built up in the home. Plus, the buyer will avoid thousands of dollars in closing costs.
An assumable mortgage clause allows a buyer to take over mortgage payments for an existing loan on behalf of a seller. The original homeowner is released from any liability toward the loan, while the buyer assumes responsibility for the mortgage payments and ownership of the property.
Qualifying for an assumable mortgage first depends on determining whether the loan includes an assumption clause. If it does, the lender may consider the buyer's income, debt ratios, credit scores, and other financial factors to determine their ability to repay the mortgage loan.
Assuming a mortgage could be beneficial to a homebuyer if they're able to get a loan with an interest rate that's below current market rates. The buyer may also save money on closing costs, depending on what fees are involved in transferring ownership of the home and the associated loan obligation. Buyers may also be able to get a mortgage with a lower down payment requirement.
There are many variables when you buy a home, from the interest rate on the mortgage, to whether the closing costs are discounted as part of a deal, and more. Buyers of a home want to ensure they can get the best deal out there as purchasing a home is expensive.
While assumption clauses are not allowed in most conventional mortgages, they can be beneficial if they're available. In a high-rate market, taking over a lower-rate mortgage can save you thousands of dollars. Closing costs can sometimes be high and are nice to avoid, which you can also get through an assumption clause.
It's always best to shop around and see what deals are available in the market to ensure you are paying the least amount possible for your home.
A bullet transaction is a loan in which all principal is repaid when the loan matures instead of in installments over the life of the loan.
HOPE for Homeowners was a federal program aimed at helping homeowners in financial distress due to the collapse of the subprime mortgage market in 2008.
Negative points are rebates that mortgage lenders offer to borrowers or brokers. These are offered as incentives for the borrower as points lower their upfront costs.
A spot loan is a type of mortgage loan made for a borrower to purchase a single unit in a multi-unit building that lenders issue quickly—or on the spot.
A defeasance clause is a mortgage provision indicating that the borrower will receive title to the property once all mortgage payment terms are met.
A federal subsidy recapture is the payment of a tax after the sale of a home originally purchased with a federally subsidized mortgage.
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