An assumption fee is a charge lenders require when a buyer takes over, or “assumes,” an existing mortgage loan from a seller instead of applying for a new loan. This fee covers the lender’s administrative costs for reviewing the buyer’s creditworthiness and processing the legal paperwork to officially transfer the loan into the new borrower’s name.
Loan assumptions can be an effective way to secure a favorable interest rate when current mortgage rates are higher than the original loan’s rate. However, most conventional loans include a “due-on-sale” clause that prevents loan assumption by requiring the full loan balance be paid upon sale of the property.
Certain government-backed loans are often assumable, including Federal Housing Administration (FHA) loans, Department of Veterans Affairs (VA) loans, and U.S. Department of Agriculture (USDA) loans. Even with these, the lender must approve the new borrower by verifying income, credit, and ability to repay before allowing the assumption.
The assumption fee varies but generally ranges between $500 and $1,500 or can be a small percentage of the outstanding balance. According to the Consumer Financial Protection Bureau, some lenders charge up to 1% of the loan amount. This fee is paid at closing along with any equity the buyer pays the seller.
For example, if a buyer assumes an FHA loan of $350,000 with a low interest rate, but the home’s sale price is $450,000, the buyer must pay the $350,000 mortgage balance to the lender through assumption, plus the $100,000 difference (seller’s equity) to the seller, plus the assumption fee to finalize the transaction.
Assuming a loan can save buyers money with a lower interest rate and typically involves lower closing costs compared to securing a new mortgage, which usually includes higher fees and origination costs. However, buyers must consider the upfront equity payment and ensure they qualify for the assumption.
For comprehensive details on loan assumptions, see our related article on Loan Assumption. Also, understand clauses that affect assumptions like the Mortgage Acceleration Clause.
External resources:
- Consumer Financial Protection Bureau on Mortgage Assumption
