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Are USDA Loans Assumable?

USDA loans have a number of benefits – chief among them the fact that there is no down payment required.

While they have the reputation of being rural loans for low and moderate-income families, the truth might be surprising:

  • They cover 97% of the United States (This interactive map will show you the vast options.)
  • The income guidelines are dynamic based on family size and location. USDA and lenders look at household income in relation to an area’s median income, but since it’s based on your local cost of living, it might be a lot higher than you would imagine -- this map will show you what it is in your area.

USDA loans have another big benefit, especially during times of rising interest rates. These government-backed loans are assumable.

Let's take a closer look at assumability.

How Does USDA Loan Assumability Work?

When a homebuyer assumes a USDA mortgage, it typically means they take over the outstanding mortgage balance with the same interest rate and terms as the current owner.

Assumability is often most desirable when the current mortgage has a lower interest rate than a buyer could get today. However, there are a couple of other big advantages with a USDA loan assumption, including:

  • You can save on closing costs: While you still might be responsible for some closing costs, like an assumption fee and a credit and title report, with an assumable USDA loan, you will be off the hook for a large portion of these costs. In general, USDA loan assumption means you are probably looking at one-fourth to one-third the cost of closing on a new mortgage.
  • You can save on the upfront funding fee: USDA loans charge a 1% funding fee for new loans, so you won’t have to pay this for an assumable USDA loan. If the loan was for $200,000, that’s $2,000 you have saved right off the bat.

Qualifying for a USDA Loan Assumption

There are some things to know about how to qualify for an assumable USDA loan. Unfortunately, it’s not just as simple as telling the seller you’d like to take over their loan.

You still have to qualify for it based on both the USDA’s and your lender’s guidelines.

That means you’ll have to:

  • Obtain a property that falls within USDA’s parameters
  • Have an income that is suitable for a USDA loan
  • Have the required debt to income ratio
  • Meet a lender’s credit score benchmark
  • Make sure the seller is current on the existing loan.

Downsides of Assuming a USDA loan

There are a few reasons you may not want to go the USDA loan assumption route.

Here are two common ones to consider:

1) You’ll need money upfront:

USDA loans are appealing in part because there is “no down payment,” and we have already mentioned that you won’t have to pay the “funding fee.” However, with an assumable USDA loan, you have to come up with the amount of equity the seller has in the home, known as a “predetermined down payment.”

So if they have already paid off $15,000 of their loan, you will need to have that much money on hand to give them to clear their role in the loan. If you don’t have that money available and are looking into a second mortgage to finance it, then the choice might not make sense given the closing costs and other fees of that second mortgage.

2) Lender choice:

With an assumable USDA loan, you will have to stick with the lender that the original loan was under, so you can’t shop around.

If you’re wondering if USDA loans are assumable, the answer is often yes. USDA loan assumption can make a lot of sense, particularly in a high interest rate environment, provided you qualify and that it makes financial sense for your personal situation.