What are loan assumptions?

A loan assumption is a process by which a home buyer takes over the mortgage of a seller, according to Bankrate. The lender grants the buyer the same repayment terms, balance and interest rate as the original homeowner had, eliminating the buyer’s need to apply for a new mortgage with terms that may be less favorable. Assumptions are typically allowed on loans sponsored by the U.S. Department of Veteran Affairs or the Federal Housing Administration.

An assumption may be a cost-saving option when the current market rates are higher than those of the seller’s mortgage, Fox Business states. Buyers may also prefer an assumption if they do not have a strong enough credit score to get a manageable rate, and government loans are generally less expensive and may require a smaller down payment than private financing. In a poor economy, government-insured loans and assumptions can make home ownership a possibility for people who do not qualify for conventional loans.

However, the buyer is still required to complete the existing lender’s application process and satisfy the approval terms, Bankrate notes. In most cases, an appraisal is not necessary for an assumption, but the buyer may obtain one to avoid paying more than the property is currently worth. An assumption can be an attractive selling point, unless the current owner has high equity. The arrangement may be unfavorable for the seller if the lender does not approve a liability release, making the original homeowner accountable if the new buyer fails to make payments.