Should I assume the seller’s mortgage?

Taking over a seller’s mortgage

FHA, VA and USDA loans are assumable: a qualified buyer can take over the seller’s loan, keeping its interest rate and remaining term. When the seller’s rate is far below today’s, that can mean a much lower payment. Most conventional loans aren’t assumable, because they must be paid off when the home is sold.

The equity gap

The catch is the seller’s equity: the difference between the price and the loan balance. You must cover it with cash, a second loan, or both. On a $450,000 home with a $300,000 balance, that’s $150,000. If your cash doesn’t cover it, a second loan at a higher rate fills the gap, and the calculator blends the two payments.

An example

Assuming a $300,000 VA loan at 3% with 26 years left, plus a $70,500 second loan at 8%, comes to about $1,920 a month. A new loan at 6.5% would cost about $2,360 a month on the same purchase, so assuming saves roughly $440 a month in this case.

Things to know

• The loan servicer must approve you, much like a new loan, and assumptions can take longer to close.
• VA assumptions carry a 0.5% funding fee. The seller’s VA entitlement stays tied to the loan unless the buyer is an eligible veteran who substitutes their own, which matters to many VA sellers.
• Finding a second lender for the equity gap can be the hardest part, so ask early.

Steps to assume a loan

Ask the listing agent for the loan’s current balance, rate, remaining term and servicer. Contact the servicer early about its assumption process and timeline, since some take two to three months. Line up financing for the equity gap at the same time, and write enough time into your contract for the assumption to be approved.

Questions buyers ask