Loan assumption occurs when a buyer takes over an existing mortgage loan from the original borrower, agreeing to continue payments under the original terms. Unlike obtaining a new mortgage, loan assumption involves inheriting the current balance, interest rate, and repayment schedule. For this to happen, lender approval is mandatory and usually involves verifying the new borrower’s creditworthiness, income, and ability to repay the loan.
Not all loans are assumable. Most conventional loans include a “due-on-sale” clause, which requires full loan repayment upon property transfer, preventing assumption unless waived by the lender. However, many government-backed loans, such as FHA, VA, and USDA mortgages, are typically assumable under specific conditions.
The loan assumption process includes several key steps. First, the lender evaluates the new borrower’s qualifications, similar to underwriting a new mortgage. Then, if approved, a legal “novation” agreement is often created, releasing the original borrower from future liability. Finally, ownership transfers to the new borrower, who continues making payments.
Benefits of loan assumption include potentially lower interest rates compared to current market rates, reduced closing costs, and possibly faster transaction times. Sellers may benefit from a larger pool of buyers and a more attractive sale.
However, risks exist. Buyers must still perform due diligence on the property and meet lender qualifications. They may need to cover any difference between the loan balance and the home’s market value through additional financing. Sellers must ensure they receive a release of liability to avoid remaining responsible for the mortgage if the new borrower defaults.
Loan assumption is especially relevant during periods of rising interest rates or in family transfers and divorce settlements. Understanding the legal and financial implications is critical before proceeding.
For official guidance, see the FHA Single Family Housing Policy Handbook, VA Loan Assumption details, and USDA Rural Development Housing Loans.
