In real estate transactions, an assumption agreement allows a third party to “assume” or take over the loan of the property’s seller.

Mortgages may be assumed when the house is sold, a divorcing spouse is awarded the property in a settlement or when someone inherits property.

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Such agreements are more common when interest rates are high because they offer the buyer the lower monthly payments the seller locked in when purchasing the property.

Not all mortgages offer an assumption option—indeed, they generally have a “due-on-sale” clause that says that when the property is transferred to another buyer the loan becomes due and payable to the mortgage holder in full.

But conventional and government-backed loans, including those issued by the Federal Housing Administration, the Department of Veterans Affairs and the U.S. Department of Agriculture, allow such transfers. (In the case of the Veterans Affairs, assumption agreements are only allowed when the buyer, like the seller, is an active-duty service member, reservist, veteran or eligible surviving spouse.)

An assumption agreement allows a third party to "assume," or take over, the loan of the property's seller. Credit: Scott Graham/Unsplash

Just as when taking out a new mortgage, those who are assuming mortgages must complete an income-qualification process, which includes revealing a credit score and employment status, to show the lender they have enough assets to cover the payments. (The seller’s credit history, on the other hand, has no bearing on the process as he/she already has the loan.) The process of assumption generally takes 45 to 90 days.

Although mortgage assumption agreements are not viable in every case, they do offer several advantages.

They cut closing costs because no new loan is being created and no new appraisal on the property is necessary. But they do require the buyer to pay off the original borrower’s equity. For instance, if the seller took out a $1 million loan and has paid it down to $750,000, the buyer would have to reimburse the seller a hefty $250,000 on the spot to cover the equity. The buyer would also have to foot the costs in cash for the difference in price between what the seller paid for the property and what the seller is asking for the property in the current transaction. If, for example, the seller and buyer in this scenario agree the new price is $2 million, the new buyer would have to come up with an additional $1 million, plus the $250,000, to assume the loan, which has $750,000 left to pay off.

Generally, assumable agreements have smaller mortgage amounts owed because whether it’s a 30-year mortgage or a 15-year mortgage, the seller will have been paying it down for several years, and the buyer will be making not only fewer payments but will also be saving on interest, which is paid off during the first years of the loan.

The closing proceeds just as it would if the buyer had taken out a new loan. At that time, the seller asks the lender for a signed release absolving him/her of future loan liability.

Loan assumption agreements may also be used in property rentals, with the new tenant taking over the lease payments.

Loan assumption agreement forms are available online from a variety of sources.