Are USDA Loans Assumable?

Taking over a seller’s existing mortgage loan can simplify the financing process and help you save money. This is called “assuming” a mortgage, but are USDA loans assumable?

Fortunately, under the right conditions, USDA loans are assumable. It might be an attractive option because you can get a USDA loan for zero down.

This article will take a closer look at how USDA assumable mortgages work, how to qualify for one, the advantages and disadvantages of assuming a mortgage, the steps involved, and more.

How Does USDA Loan Assumption Work?

Loan assumption means a borrower takes over a seller’s existing mortgage loan and continues making payments on that mortgage instead of getting a separate, brand-new loan.

“That means the buyer keeps the existing loan’s original fixed interest rate, loan term, and remaining balance owed,” says Martin Boonzaaijer, CEO of the Trusted Home Buyer. “For example, if the seller has a 3% interest rate locked in from a few years ago when rates were historically low (compared to today’s mortgage rates which average around 6.5%) that’s a major savings opportunity for the buyer.”

Of course, the buyer needs to meet lender requirements and pay the seller for any equity they’ve built up in the home (the difference between the home's value and the remaining loan balance). For example, let’s say a seller’s home has increased by $50,000 since they bought it. The buyer would be responsible for paying the seller $50,000 for the built-up equity.

“It’s a niche opportunity that can save buyers money if the seller’s current loan has a lower rate than the buyer could qualify for today, but it’s not a free ride,” says Steven Glick, director of mortgage sales for HomeAbroad. “You’ve still got to qualify and handle the paperwork just like a new loan.”

Qualifying for a USDA Loan Assumption

Loan assumption isn’t as simple as telling the seller you’d like to take over their existing loan. You still have to qualify for that loan based on the USDA’s guidelines and your lender’s rules. Count on meeting these requirements:

• The home must be your primary residence; it cannot be a rental or vacation home.
• The property must be located in a USDA-approved rural or suburban area.
• Your household earnings can’t surpass 115% of your area’s median income, which includes income from everyone residing in the home, even if they aren’t on the loan.
• You will need a credit score of at least 640, although some lenders permit a lower score with extra paperwork.
• Your debt-to-income (DTI) ratio (the amount of debt you have relative to your income) should be 41% or lower, unless you have strong compensating factors (like a higher credit score, strong history of payments, significant cash reserves after closing, and a history of stable employment).
• You must be a U.S. citizen, non-citizen national, or legal resident.

If the seller is behind on their loan payments, the USDA loan cannot be assumed, no matter how qualified you are.

Pros and Cons of Assuming a USDA Loan

USDA loan assumption offers several key benefits:

• Lowered interest rate: You could inherit a lower interest rate than what’s available on the market today.
• Keep original terms: You get to retain the loan’s original terms, which also means you could pay off the loan more quickly.
• No down payment: You won’t have to make a down payment as long as you qualify for the assumed loan, although there are extra costs involved, such as paying the homeowner for the equity they’ve built.
• Closing cost savings: You’ll generally save on closing costs compared to a brand-new loan.
• Simpler, quicker process: The process is typically simpler and quicker compared to a new USDA loan that requires a full mortgage application.
• No new property appraisal: You won’t have to get a second appraisal, saving you money and time.
• No guarantee fee: You won’t have to pay the USDA guarantee fee. USDA loans charge a 1% funding fee for new loans, but the seller would have already covered it.
• Can refinance: You can later refinance an assumed loan into a new USDA, FHA, VA, or conventional loan if you’re eligible. However, the assumed loan must be in your name for at least 12 months with a history of on-time payments, and the home must remain your primary residence.

On the other hand, USDA loan assumption has several drawbacks:

• More cash required: You’ll need more money upfront to pay for the equity the seller has accrued in their home. You could pursue a second mortgage or personal loan to finance it; however, that strategy may not be worth it, considering the extra closing costs and fees of that separate financing, as well as a likely higher interest rate than the assumed mortgage.
• Inflexible loan terms: You cannot reset the loan term. “You’re picking up the loan where the seller left off. So, for instance, if they already paid for seven years, you’ll be taking over the remaining 23 years on a 30-year mortgage,” Boonzaiijer explains.
• No lender flexibility: You’ll have to stick with the seller’s original lender; you cannot shop around for better financing.
• The process may take longer: The loan approval process may take a while. “The USDA and the seller’s lender both have to review the loan assumption, which can take weeks or even months,” says Glick.
• Loan assumption fee: You’ll pay a loan assumption fee, which can span from $300 to $500 or more, depending on the lender.
• Delinquencies can disqualify you: Any seller delinquency disqualifies you. If the seller has missed any mortgage payments, the loan cannot be assumed.

“Also, the original borrower’s cooperation is crucial. I’ve seen deals fall apart because the seller would not provide necessary documentation or stopped communicating,” cautions personal finance expert Andrew Lokenauth. “And property improvements can complicate things, too. If the current owner has made significant changes, they’ll need to be up to USDA standards. I’ve had a client almost lose their assumption because of a home addition that wasn’t properly permitted, which took weeks to sort out.”

Steps Involved in the Assumption Process

Here’s what you’ll need to do to assume a USDA loan:

1. Verify loan assumability: Contact the seller’s lender to confirm that the USDA loan is assumable and check for any requirements, such as ensuring there are no overdue payments.
2. Prepare financial documentation: Gather documents like your W-2s, pay stubs, tax returns, bank statements, and credit history to demonstrate your financial stability. Check with the lender to learn more about other things you need.
3. Submit your application: Send your completed application along with your financial documents to the loan servicer, who will assess your income, credit score (ideally 640 or higher), and debt-to-income ratio (typically under 41%).
4. Obtain USDA approval: The USDA will review your application to ensure both you and the property meet their eligibility criteria.
5. Cover fees and equity: After approval, pay the assumption fee and settle any remaining equity with cash or a second loan.
6. Finalize the transfer: At closing, sign the necessary documents to officially transfer the loan and home into your name and begin making payments.

“The entire process typically takes 45 to 60 days, in my experience,” says Lokenauth. “I’ve seen it take even longer when there are title issues or missing paperwork.”

Assumption Rules for Other Loan Types

The Bottom Line

Assuming a USDA loan can be worth it if that mortgage has an attractive interest rate, you can afford to pay off the owner’s accrued equity, and you qualify for loan assumption.

“This strategy is particularly smart if you are planning to live in a rural area and don’t mind a little extra paperwork,” says Boonzaaijer. “Just keep in mind that you’ll need extra cash upfront and the process can move slowly, especially if the loan servicer is not familiar with how assumptions work. But with patience and some guidance from your trusted team, including your real estate agent and attorney, it can be a worthwhile path.”