Are Fannie Mae Loans Assumable?

Fannie Mae is one of the largest players in the mortgage industry. They purchase and securitize a huge number of conventional loans in the United States. But one question homebuyers often have is – are Fannie Mae loans assumable?

The short answer is no Fannie Mae conventional fixed-rate mortgages are not assumable,

But what does that mean exactly? And are there any exceptions or workarounds? Let’s dig into the details

What Is a Mortgage Assumption?

First we should define what it means to “assume” a mortgage.

Assuming a mortgage simply means taking over the existing home loan from the current owner. The new owner takes on all the same terms, conditions, interest rate, and remaining repayment period.

It’s basically just substituting your name as the borrower while everything else stays the same. The lender has to approve the assumption, but it’s fairly straightforward in many cases.

This can be advantageous when mortgage rates rise. The new owner can swoop in and lock in an older, lower rate by assuming the mortgage.

Why Fannie Mae Loans Are Not Assumable

Fannie Mae primarily deals in conventional, conforming mortgages. These are mortgages that meet the standards to be purchased and securitized by the GSEs (government-sponsored enterprises) Fannie Mae and Freddie Mac.

Conforming loans must adhere to certain requirements like maximum loan limits. And most conventional mortgages with the GSEs contain a “due-on-sale” clause.

This clause states that the loan becomes due in full if the home is sold. So they cannot be assumed by a new owner without refinancing.

Fannie Mae securitizes fixed-rate mortgages which are simply not assumable. Their guide states clearly that assumption is not allowed on conventional fixed-rate first mortgages.

Limited Exceptions

There are a couple limited exceptions when a Fannie Mae loan can potentially be assumed:

• Adjustable-rate mortgages – Fannie Mae does allow assumptions on ARM loans. But again, why assume an adjustable rate in a rising rate environment?

• Some older loans – Loans originated prior to December 14, 1989 may be assumable. But given most mortgages run 30 years or less, it’s unlikely you’ll find one of these unicorns.

• Mortgage assistance programs – In some cases Fannie may allow assumption of a delinquent loan by a qualified new buyer as a way to avoid foreclosure. But strict criteria apply.

So in nearly all normal scenarios, no, Fannie Mae’s conventional loans cannot be assumed.

What Loan Types Are Assumable?

If you’ve got your heart set on an assumable mortgage, you’ll likely need to look at government-backed loans like:

• FHA loans
• VA loans
• USDA loans

These mortgages backstop the lender against loss, so the agencies have less heartburn about loan assumptions.

FHA is probably the most flexible, starting with credit scores as low as 580. VA works for veterans and service members only. USDA is geographically limited based on property location.

All come with their own sets of criteria for new borrowers hoping to assume the mortgage. So read up on the specific program guidelines.

The Assumption Process

If you’ve identified an assumable government loan on a home you want to buy, the process looks like:

• You’ll fill out a full mortgage application just like any borrower
• Provide supporting documents for income, tax returns, assets, credit etc.
• Get your credit report pulled and verify score meets the minimum
• Show you have funds to cover down payment and closing costs
• Complete underwriting and get approval from the government agency insuring the loan
• Sign assumption agreement with lender

Yes there are still closing costs, but you may save a bit without a full appraisal.

Down payments can be larger than normal. You often pay the difference between the existing mortgage balance and current home price.

The Downsides of Assumptions

Some drawbacks to assuming a mortgage include:

• Higher down payments frequently required
• Limited to specific government loan programs
• Inherit PMI payments on FHA/USDA loans
• Better rates often available with new conventional loan

Run the numbers closely to see if assumed mortgage savings outweigh higher upfront costs.

Shop for the best rates available to you today before deciding to pursue an assumption.

When Do Assumptions Make Sense?

Assuming a mortgage really only makes sense in certain situations:

• In a rising rate environment
• If you can get a much lower rate than available to you now
• If you lack resources for a large down payment on a new mortgage

This strategy is all about locking into an old, low fixed rate when rates are on the way up.

But it may not work when you can get similar or better rates with a new conventional mortgage backed by Fannie Mae.

Alternatives to Assumptions

Some alternatives to assuming a mortgage include:

• Take out new conventional loan – If you qualify for similar rates, this opens up more options

• Lease-to-own agreement – Make lease payments to the seller over 1-2 years, then buy the home outright

• Seller financing – The seller provides you with a private mortgage to buy the home

Each option has pros and cons to weigh. A lease-to-own or seller financing can give more flexibility but may come with higher costs.

The Bottom Line

Assuming a mortgage with Fannie Mae is likely a non-starter. Exceptions are few and far between on their conventional loans.

But assumptions may be possible with government loans like FHA, VA, and USDA – if you meet eligibility requirements.

This path is mostly attractive to lock in old, low fixed rates in a rising rate environment. But don’t dismiss alternatives before deciding to pursue an assumption.

Calculate exactly how much you’ll save over the life of the loan before moving forward. Assumed mortgages come with their own costs and downsides.