What Home Loans Are Assumable?
Not all home loans are assumable. In fact, most conventional mortgages – those not backed by a government agency but by a private lender – aren’t assumable. One exception with conventional loans occurs if someone is a “successor in interest,” meaning the property is transferred to them during another person’s lifetime or after that person’s death. You can also assume an adjustable-rate mortgage that’s outside of its initial fixed period.
However, loans insured by the Federal Housing Administration (FHA) or backed by the Department of Veterans Affairs (VA) or United States Department of Agriculture (USDA) are assumable as long as specific requirements are satisfied.
For most FHA and VA loans, a seller must obtain lender approval for an assumable mortgage.
FHA Loans
Newer FHA loans require both buyer and seller to meet specific criteria for an assumable mortgage. Sellers must live in the home as a primary residence for a set amount of time, and buyers must follow the standard FHA loan application process.
FHA mortgages are more accessible for buyers with a lower credit score. Most lenders require a minimum score of 580 for FHA loan approval, although some allow for a credit score as low as 500 if the borrower can make a 10% down payment. FHA loans require a down payment of only 3.5% of the purchase price if the borrower’s credit score is 580 or above.
VA Loans
VA loans – which come with several perks, the most notable being a zero down payment requirement – are available to active-duty service members, veterans, members of the National Guard and Army Reserve, and surviving spouses who all meet certain requirements for eligibility. A buyer who’s not a qualified current or former military service member or surviving spouse can apply for a VA loan assumption. If someone who doesn’t usually qualify for a VA loan takes over the loan, the seller loses their VA entitlement.
Depending on how the loan was set up, a lender may also need to have the loan approved by the VA Regional Loan Center. This step requires extra time to process paperwork.
In very rare cases, a buyer might come across a freely assumable loan that applies to any VA loan closed on or before March 1, 1988. Sellers who fall in this category don’t need to obtain lender approval. However, they may still be liable for making payments if a buyer fails to pay their mortgage on time, so it’s best to still get a liability release from the VA.
USDA Loans
USDA loans, which like VA loans allow for no money down, are also assumable. The most important piece of information to know here is that borrowers will need approval from both their lender and the USDA in most instances. The exceptions are successor-in-interest cases, which we discussed earlier in the context of conventional loans. The seller maintains responsibility for the mortgage until the buyer assumes liability.
Rocket Mortgage® doesn’t offer USDA loans at this time.
