Quick Answer
A loan assumption is a transaction in which a buyer takes over an existing mortgage through a lender-approved process, subject to the loan terms and the lender consent. The buyer becomes the borrower, and the seller is typically released from liability.
How Assumptions Work
Not all mortgages are assumable. Conventional loans typically are not assumable. FHA, VA, and USDA loans may be assumable under certain conditions, subject to lender approval and qualification requirements.
Example: Assuming a Low-Rate Loan
A buyer purchases a home for $400,000. The seller has an existing FHA loan with a $250,000 balance at 3.25%. The buyer qualifies with the lender, assumes the $250,000 loan at the same 3.25% rate, and pays the remaining $150,000 in cash or through other financing.
The buyer now owes the lender $250,000 as the borrower of record. The seller is released from that obligation (subject to the terms of the assumption agreement).
Not Every Loan Is Assumable
Even for loans that are assumable by their terms, the buyer must typically meet the lender credit and income requirements. The lender must approve the assumption. The process may involve application, documentation, and closing fees.
The Seller Equity Gap
An assumption only covers the existing loan balance. If the property is worth more, the buyer must pay the difference. For a $400,000 property with a $250,000 assumable loan, the buyer needs $150,000 above the assumed loan. This gap can be paid in cash or through other financing structures.
Assumption Is Not Subject-To
A loan assumption is fundamentally different from a subject-to transaction. In an assumption, the lender approves the buyer as the new borrower. In a subject-to, the buyer takes the property subject to the existing loan without lender approval and the seller remains on the note. See Loan Assumption vs. Subject-To for a full comparison.