Does Assuming a Mortgage Hurt My Credit?

Assuming a mortgage will not hurt your credit any more than if you were to apply for a new loan – as long as you keep up with your regular mortgage payments and do not fall behind. In actuality, with consistently timely payments, you are more likely to see a boost in your credit score. You will, however, still need to find a lender and qualify before you are able to assume the loan.

The assumable mortgage process is a bit different than obtaining traditional financing, but it can also have great benefits for the buyer. When you assume a mortgage, you are assuming the responsibility of paying off the remaining mortgage debt of the previous owner. However, when you assume a mortgage, not only do you assume the remaining debt, but the terms, rates and other contractual obligations spelled out in the loan also remain the same. Because of these reasons, homes with an assumable mortgage can be more attractive options in a climate of high interest rates than a home with a mortgage you cannot assume.

For example, say you’re in the market for a new home and current interest rates are hovering around 4 percent. If you find a home with an assumable mortgage and a rate of 3 percent with 25 years remaining, your mortgage would have the same 3 percent interest rate and 25-year term when you assume it. This difference in interest can save you a fair bit of money over the life of your loan.

But, not all home loans are assumable. Only federally insured loans guaranteed by the Federal Housing Administration, the U.S. Department of Agriculture Rural Development Guaranteed Housing Loan Program and the U.S. Department of Veterans Affairs are assumable. This means that a conventional loan cannot be an assumable loan.

It’s important to note that when you assume a mortgage, the previous borrower’s payment and credit history has no bearing on yours. However, even though you are assuming the mortgage (in essence "taking over" the payments), you will still need to get loan approval from a lender as if you were applying for a brand new mortgage. Your lender will need to check your credit score and verify your employment history – among other things – to ensure you are able to assume the mortgage.

An assumable mortgage has its pros and cons for both the buyer and the seller. Although the possibility of a lower interest rate is appealing to buyers, they need to keep in mind that if the seller has a lot of equity in the property, there will be a much larger down payment required to cover this equity. This can be quite costly and may mean buyers have to take out a second mortgage or find other financing to afford the down payment. For example, you assume a loan with $100,000 balance remaining, and the asking price of the home is $200,000. You will need to make a down payment of at least $100,000 to assume the loan.

Sellers need to be cautious when letting a buyer assume their mortgage. They must be certain that the lender has completely transferred the responsibility to repay the loan to the new buyer. If the new borrower falls behind on the monthly mortgage payments, or defaults on the loan, the previous owner could incur liability and have their credit negatively impacted as a result of the new borrower’s actions. This is why it is important to make sure that liability is properly transferred.