All About USDA Loan Assumption

Are USDA loans assumable?

Yes, USDA loans are indeed assumable, but it's important to understand what loan assumption means.

Loan assumption is a process where the buyer of a property takes over, or "assumes," the mortgage loan as well as the property of the seller. Instead of getting a new loan, the buyer steps into the seller's shoes and continues making the existing loan payments under the same terms.

How to Assume a USDA Loan

Assumable loans are subject to the lender's approval. In the case of USDA assumable loans, the buyer needs to meet USDA eligibility requirements and the loan must be in good standing. The USDA must approve the assumption, and the assuming buyer must be owner-occupant, meaning they intend to live in the home as their primary residence.

Assuming a USDA loan differs from a typical USDA mortgage purchase in several ways. Let’s review the process:

Step 1: Determine Eligibility

To assume a USDA loan, you must confirm that you meet eligibility requirements. These requirements include demonstrating creditworthiness, income stability and meeting the USDA's debt-to-income ratio guidelines.

Step 2: Find a Property

Locate a property with an existing USDA loan that you wish to assume. This can be done by searching for homes listed for sale in rural areas or through real estate agents specializing in USDA loans. Another tip is to search a multiple listing service (MLS). You can use this property eligibility map to double-check the eligibility of a listing.

Step 3: Contact the Loan Servicer

Reach out to the loan servicer or lender currently servicing the USDA loan on the property. Obtain information about the loan and express your interest in assuming it. The loan servicer will provide guidance on the process and provide you with the necessary paperwork.

Step 4: Gather Documentation

Prepare the required documents for assuming the USDA loan. These typically include financial statements, employment verification, tax returns, bank statements and any other documentation requested by the loan servicer to assess your creditworthiness.

Step 5: Submit an Assumption Application

Complete the assumption application provided by the loan servicer. This form will require personal and financial information about yourself and any co-borrowers. Ensure that all information is accurate and complete before submitting the application.

Step 6: Await Approval

Allow the loan servicer to review your application. They will assess creditworthiness, income stability and other factors to determine whether you qualify to assume the USDA loan. This process may take time, so be patient during the review period.

Step 7: Complete Closing

Once the closing is complete, the loan will be transferred to your name, and you will assume responsibility for the remaining balance.

It's important to note that USDA loans are assumable, but not all lenders or loan servicers may allow assumptions.

Benefits of Assuming a USDA Loan

See the following table for a quick breakdown of the benefits of USDA loan assumption for both buyers and sellers, then read more about each benefit below:

Buyer Benefits of USDA Loan Assumption

Lower Interest Rate

One of the most significant advantages of assuming a USDA mortgage is that buyers can obtain a lower interest rate than what is currently available in the market. This can result in significant savings over the life of the loan.

No Second Appraisal Required

A USDA home appraisal is a process that takes place before loan approval, where a licensed appraiser ensures the property meets USDA property guidelines. Thankfully, with a loan assumption, the home you are buying has already been through this process.

Closing Costs Savings

When assuming a USDA loan, buyers are not subject to paying the upfront 1% funding fee because it has already been covered by the seller.

Seller Benefits of USDA Loan Assumption

Expanded Buyer Pool

Offering an assumable USDA mortgage can attract a larger pool of potential buyers, particularly if your interest rate is lower than the current market rate. This can increase the chances of selling the property quickly.

Competitive Advantage

If the assumable USDA mortgage has a lower interest rate or more favorable terms than current market rates, sellers may be able to negotiate a higher sales price for their property.

Retained Equity

If the seller has built up equity in the home, the assumable USDA mortgage allows them to transfer the property and its associated debt to the buyer, enabling the seller to preserve their equity without having to pay off the loan entirely.

Drawbacks of Assuming a USDA Loan

Despite the many benefits that assuming a USDA loan offers, there are a couple of drawbacks that buyers should keep in mind when considering this option:

Cash Up Front

If the home of interest has increased in value since its purchase from the seller, the loan may no longer account for the home’s value. In this case, the buyer will need to compensate the seller for the equity they’ve built in the home. This can get costly. For instance, say the seller bought the home for $250,000, and it has increased in value by $50,000. The buyer would be responsible for the $50,000 difference to compensate for the equity the seller built.

Limited Negotiation Power

When a buyer assumes a USDA mortgage, they are bound to the original loan terms and loan servicer.