What Is an Assumable Mortgage?

An assumable mortgage is a type of financing arrangement whereby an outstanding mortgage and its terms are transferred from the current owner to a buyer. By assuming the previous owner’s remaining debt, the buyer can avoid obtaining their own mortgage. Different types of loans can qualify as assumable mortgages, though there are some special considerations to keep in mind.

Understanding Assumable Mortgages

Many homebuyers typically take out a mortgage from a lending institution to finance the purchase of a home or property. The contractual agreement for repaying the loan includes the interest that the borrower must pay, as well as the principal repayments to the lender.

If the homeowner decides to sell their home later, they may be able to transfer their mortgage to the homebuyer. In this case, the original mortgage taken out is assumable.

An assumable mortgage allows a homebuyer to assume the current principal balance, interest rate, repayment period, and any other contractual terms of the seller’s mortgage. Rather than going through the rigorous process of obtaining a home loan from the bank, a buyer can take over an existing mortgage.

There could be a cost-saving advantage if current interest rates are higher than the interest rate on the assumable loan. In a period of rising interest rates, the cost of borrowing also increases. When this happens, borrowers will face high interest rates on any loans approved. Therefore, an assumable mortgage is likely to have a lower interest rate, an attractive feature to buyers. If the assumable mortgage has a locked-in interest rate, it will not be impacted by rising interest rates. A mortgage calculator can be a good resource to budget for the monthly cost of your payment.

What Types of Loans Are Assumable?

Some of the most popular types of mortgages are assumable: Federal Housing Authority (FHA), Veterans Affairs (VA), and the U.S. Department of Agriculture (USDA). Buyers who wish to assume a mortgage from a seller must meet specific requirements and receive approval from the agency sponsoring the mortgage.

FHA loans

FHA loans are assumable when both transacting parties meet the requirements for the assumption. For instance, the property must be used by the seller as their primary residence. Buyers must first verify that the FHA loan is assumable and then apply as they would for an individual FHA loan. The seller’s lender will verify that the buyer meets the qualifications, including being creditworthy. If approved, the mortgage will be assumed by the buyer. However, unless the seller is released from the loan, they are still responsible for it.

VA loans

The Department of Veterans Affairs offers mortgages to qualified military members and spouses of military members. However, to assume a VA loan, the buyer need not be a member of the military to qualify. Although, the lender and the regional VA loan office will need to approve the buyer for the loan assumption, and most often, buyers who assume VA loans are military members.

For loans initiated before March 1, 1988, buyers may freely assume the VA loan. In other words, the buyer does not need the approval of the VA or the lender to assume the mortgage.

USDA loans

USDA loans are offered to buyers of rural properties. They require no down payment and often have low interest rates. To assume a USDA loan, the buyer must meet the standard qualifications, such as meeting credit and income requirements, and receive approval from the USDA to transfer title. The buyer may assume the existing rate of interest and loan terms or new rates and terms. Even if the buyer meets all requirements and received approval, the mortgage cannot be assumed if the seller is delinquent on payments.

Advantages and Disadvantages of Assumable Mortgages

The advantages of acquiring an assumable mortgage in a high-interest rate environment are limited to the amount of existing mortgage balance on the loan or the home equity. For example, if a buyer is purchasing a home for $250,000 and the seller’s assumable mortgage only has a balance of $110,000, the buyer will need to make a down payment of $140,000 to cover the difference. Or the buyer will need a separate mortgage to secure the additional funds.

A disadvantage is when the home’s purchase price exceeds the mortgage balance by a significant amount, requiring the buyer to obtain a new mortgage. Depending on the buyer’s credit profile and current rates, the interest rate may be considerably higher than the assumed loan.

Usually, a buyer will take out a second mortgage on the existing mortgage balance if the seller’s home equity is high. The buyer may have to take out the second loan with a different lender from the seller’s lender, which could pose a problem if both lenders do not cooperate with each other. Also, having two loans increases the risk of default, especially when one has a higher interest rate.

If the seller’s home equity is low, however, the assumable mortgage may be an attractive acquisition for the buyer. If the value of the home is $250,000 and the assumable mortgage balance is $210,000, the buyer need only put up $40,000. If the buyer has this amount in cash, they can pay the seller directly without having to secure another credit line.

Assumable Mortgage Transfer Approval

The final decision over whether an assumable mortgage can be transferred is not left to the buyer and seller. The lender of the original mortgage must approve the mortgage assumption before the deal can be signed off on by either party. The homebuyer must apply for the assumable loan and meet the lender’s requirements, such as having sufficient assets and being creditworthy.

If approved, the title of the property is transferred to the buyer who makes the required monthly repayments to the bank. If the transfer is not approved by the lender, the seller must find another buyer that is willing to assume his mortgage and has good credit.

A mortgage that has been assumed by a third party does not mean that the seller is relieved of the debt payment. The seller may be held liable for any defaults which, in turn, could affect their credit rating. To avoid this, the seller must release their liability in writing at the time of assumption, and the lender must approve the release request releasing the seller of all liabilities from the loan.

Assumable Mortgages FAQs

What does assumable mean?

Assumable refers to when one party takes over the obligation of another. In terms of an assumable mortgage, the buyer assumes the existing mortgage of the seller. When the mortgage is assumed, the seller is often no longer responsible for the debt.

What does not assumable mean?

Not assumable means that the buyer cannot assume the existing mortgage from the seller. Conventional loans are non-assumable. Some mortgages have non-assumable clauses, preventing buyers from assuming mortgages from the seller.

How does an assumable loan work?

To assume a loan, the buyer must qualify with the lender. If the price of the house exceeds the remaining mortgage, the buyer must remit a down payment that is the difference between the sale price and the mortgage. If the difference is substantial, the buyer may need to secure a second mortgage.

How do I know if my mortgage is assumable?

There are certain types of loans that are assumable. For example, USDA, VA, and FHA loans are assumable. Each agency has specific requirements that both parties must fulfill for the loan to be assumed by the buyer. The USDA requires that the house is in a USDA-approved area, the seller must not be delinquent on payments, and the buyer must meet certain income and credit limits. The buyer should first confirm with the seller and the seller’s lender if the loan is assumable.

Is an assumable mortgage good?

When current interest rates are higher than an existing mortgage’s rates, assuming a loan may be the favorable option. Also, there are not as many costs due at closing. On the other side, if the seller has a considerable amount of equity in the home, the buyer will either have to pay a large down payment or secure a second mortgage for the balance not covered by the existing mortgage.

The Bottom Line

An assumable mortgage may be attractive to buyers when current mortgage rates are high and because closing costs are considerably lower than those associated with traditional mortgages. However, if the owner has a lot of equity in the home, the buyer may need to pay a substantial down payment or secure a new loan for the difference in the sale price and the existing mortgage. Also, not all loans are assumable, and if so, the buyer must still qualify with the agency and lender. If the benefits outweigh the risks, an assumable mortgage might be the best option for homeownership.

What Is the Automated Clearing House (ACH)?

The Automated Clearing House (ACH) is an electronic funds-transfer system run by Nacha. The Automated Clearing House traces its roots back to the late 1960s but was officially established in the mid-1970s. The payment system provides many types of ACH transactions, such as payroll deposits. It requires a debit or credit from the originator and a credit or debit on the recipient’s end.

How the Automated Clearing House (ACH) Works

The ACH Network is an electronic system that serves financial institutions to facilitate financial transactions in the U.S. It represents more than 10,000 financial institutions and ACH transactions totaled more than $72.6 trillion in 2021 by enabling over 29 billion electronic financial transactions.

The network essentially acts as a financial hub and helps people and organizations move money from one bank account to another. ACH transactions consist of deposits and payments, including:

Here’s how the system works. An originator starts a direct deposit or direct payment transaction using the ACH network via debit and credit. The originator’s bank, also known as the originating depository financial institution, takes the ACH transaction and batches it together with other ACH transactions to be sent out at regular times throughout the day.

An ACH operator, either the Federal Reserve or a clearinghouse, receives the batch of ACH transactions from the originating institution with the originator’s transaction. The ACH operator sorts the batch and makes transactions available to the bank or financial institution of the intended recipient, also known as the receiving depository financial institution. The recipient’s bank account receives the transaction, thus reconciling both accounts and ending the process.

Special Considerations

The ACH payment system is offered by Nacha. Formerly known as the National Automated Clearing House Association, it’s a self-regulating institution. The ACH network’s history dates back to 1968 but wasn’t officially established until 1974.

This network manages, develops, and administers the rules surrounding electronic payments. The organization’s operating rules are designed to facilitate growth in the size and scope of electronic payments within the network.

Advantages and Disadvantages of the ACH

Advantages

Because the ACH Network batches financial transactions together and processes them at specific intervals throughout the day, it makes online transactions extremely fast and easy. NACHA rules state that the average ACH debit transaction settles within one business day, and the average ACH credit transaction settles within one to two business days.

The use of the ACH network to facilitate electronic transfers of money has also increased the efficiency and timeliness of government and business transactions. More recently, ACH transfers have made it easier and cheaper for individuals to send money to each other directly from their bank accounts by direct deposit transfer or e-check.

ACH for individual banking services typically took two or three business days for monies to clear, but starting in 2016, NACHA rolled out in three phases for same-day ACH settlement. Phase 3, which launched in March 2018, requires RDFIs to make same-day ACH credit and debit transactions available to the receiver for withdrawal no later than 5 p.m. in the RDFI’s local time on the settlement date of the transaction, subject to the right of return under NACHA rules.

Disadvantages

Certain financial institutions may restrict the amount of money you can transfer. If you want to do a large transfer, you may have to do this in multiple steps. For instance, if you’re transferring money to your child who’s away in college, you may be limited to transfers of $1,000. If they need more for books and rent, you will be required to send more than one transfer.

Some banks charge fees for ACH transactions. And this can be a per-transaction fee. If you’re used to doing multiple transactions, this can add up and put a big dent in your bottom line.

The ACH network only works between U.S. accounts. This means that you can’t conduct any transactions that are meant for international transfers using this payment system. So if you want to send money to someone abroad, you must do so using a wire transfer or other similar payment processing network. As such, the transaction will not necessarily be executed on the same day.

The Bottom Line

Sending money to someone else used to be a big hassle. But the advent of electronic technology is making things much easier. The Automated Clearing House or ACH facilitates transfers between banks. This eliminates the need for withdrawing money from one account and depositing it into another. The network is updated to allow businesses and individuals to execute transactions on the same day. But keep in mind that there are restrictions—notably, that you can’t send money internationally. You may also be limited in how much you can transfer and you may end up incurring fees. Check with your bank about how it handles ACH transactions.

What Is the Applicable Federal Rate (AFR)?

The applicable federal rate (AFR) is the minimum interest rate that the Internal Revenue Service (IRS) allows for private loans. Each month the IRS publishes a set of interest rates that the agency considers the minimum market rate for loans. Any interest rate that is less than the AFR would have tax implications. The IRS publishes these rates in accordance with Section 1274(d) of the Internal Revenue Code.

Understanding the Applicable Federal Rate (AFR)

The AFR is used by the IRS as a point of comparison versus the interest on loans between related parties, such as family members. If you were giving a loan to a family member, you would need to be sure that the interest rate charged is equal to or higher than the minimum applicable federal rate.

The IRS publishes three AFRs: short-term, mid-term, and long-term. Short-term AFR rates are determined from the one-month average of the market yields from marketable obligations, such as U.S. government T-bills with maturities of three years or less. Mid-term AFR rates are from obligations of maturities of more than three and up to nine years. Long-term AFR rates are from bonds with maturities of more than nine years.

Example of How to Use the AFR

As of Apr. 2022, the IRS stated that the annual short-term AFR was 1.26%, the mid-term AFR was 1.87%, and the long-term AFR was 2.25%. Please bear in mind that these AFR rates are subject to change by the IRS.

Which AFR rate to use for a family loan would depend on the length of time designated for payback. Let’s say you were giving a loan to a family member for $10,000 to be paid back in one year. You would need to charge the borrower a minimum interest rate of 1.26% for the loan. In other words, you should receive $126 in interest from the loan.

In our example above, any rate below 1.26% could trigger a taxable event. For example, let’s say you gave the same loan, but you didn’t charge any interest. By not charging any interest, you would have “foregone” $126 in interest income, and according to the IRS, it would be considered a taxable gift. Any interest rate charged below the stated AFR for the particular term of the loan would be considered foregone interest and, as a result, be taxable.

Special Considerations

When preparing to make a loan between related parties, taxpayers should consider two factors to select the correct AFR. The length of the loan should correspond to the AFRs: short-term (three years or less), mid-term (up to nine years), and long-term (more than nine years).

If the lender charges interest at a lower rate than the proper AFR, the IRS may reassess the lender and add imputed interest to the income to reflect the AFR rather than the actual amount paid by the borrower. Also, if the loan is more than the annual gift tax exclusion, it may trigger a taxable event, and income taxes may be owed. Depending on the circumstances, the IRS may also assess penalties.

What Is Asset Management?

Asset management is the practice of increasing total wealth over time by acquiring, maintaining, and trading investments that have the potential to grow in value.

Asset management professionals perform this service for others. They may also be called portfolio managers or financial advisors. Many work independently while others work for an investment bank or other financial institution.

Understanding Asset Management

Asset management has a double-barreled goal: increasing value while mitigating risk. That is, the client’s tolerance for risk is the first question to be posed. A retiree living on the income from a portfolio, or a pension fund administrator overseeing retirement funds, is (or should be) risk-averse. A young person, or any adventurous person, might want to dabble in high-risk investments.

Most of us are somewhere in the middle, and asset managers try to identify just where that is for a client.

The asset manager’s role is to determine what investments to make, or avoid, to realize the client’s financial goals within the limits of the client’s risk tolerance. The investments may include stocks, bonds, real estate, commodities, alternative investments, and mutual funds, among the better-known choices.

The asset manager is expected to conduct rigorous research using both macro and microanalytical tools. This includes statistical analysis of prevailing market trends, reviews of corporate financial documents, and anything else that would aid in achieving the stated goal of client asset appreciation.

Types of Asset Managers

There are several different types of asset managers, distinguished by the type of asset and level of service that they provide. Each type of asset manager has a different level of responsibility to the client, so it is important to understand a manager’s obligations before deciding to invest.

Registered Investment Advisers

A registered investment adviser (RIA) is a firm that advises clients on securities trades or even manages their portfolios. RIAs are closely regulated and are required to register with the SEC if they manage more than $100 million in assets.

Investment Broker

A broker is an individual or firm that acts as an intermediary for their clients, buying stocks and securities and providing custody over customer assets. Brokers generally do not have a fiduciary duty to their clients, so it is always important to thoroughly research before buying.

Financial Advisor

A financial advisor is a professional who can recommend investments to their clients, or buy and sell securities on their behalf. Financial advisors may or may not have a fiduciary duty to their clients, so it is always important to ask first. Many financial advisors specialize in a specific area, such as tax law or estate planning.

Robo-Advisor

The most affordable type of investment manager isn’t a person at all. A robo-advisor is a computer algorithm that automatically monitors and rebalances an investor’s portfolio according, selling and buying investments according to programmed goals and risk tolerances. Because there is no person involved, robo-advisors cost much less than a personalized investment service.

How Much Does Asset Management Cost?

Asset managers have a variety of fee structures. The most common model charges a percentage of the assets under management, with the industry average at about 1% for up to $1 million, and lower for larger portfolios. Others may charge a fee for each trade they execute. Some may even receive a commission to upsell securities to their clients.

Because these incentives can work against the client’s interests, it is important to know if your management firm has a fiduciary duty to serve the client’s interests. Otherwise, they may recommend investments or trades that do not serve the client’s interests.

How Asset Management Companies Work

Asset management companies compete to serve the investment needs of high-net-worth individuals and institutions.

Accounts held by financial institutions often include check-writing privileges, credit cards, debit cards, margin loans, and brokerage services.

When individuals deposit money into their accounts, it is typically placed into a money market fund that offers a greater return than a regular savings account. Account-holders can choose between Federal Deposit Insurance Company-backed (FDIC) funds and non-FDIC funds.

The added benefit to account holders is all of their banking and investing needs can be met by the same institution.

These types of accounts have only been possible since the passage of the Gramm-Leach-Bliley Act in 1999, which replaced the Glass-Steagall Act. The Glass-Steagall Act of 1933, passed during the Great Depression, forced a separation between banking and investing services. Now, they have only to maintain a “Chinese wall” between divisions.

Example of an Asset Management Institution

Merrill Lynch offers a Cash Management Account (CMA) to fulfill the needs of clients who wish to pursue banking and investment options with one vehicle, under one roof.

The account gives investors access to a personal financial advisor. This advisor offers advice and a range of investment options that include initial public offerings (IPO) in which Merrill Lynch may participate, as well as foreign currency transactions.

Interest rates for cash deposits are tiered. Deposit accounts can be linked together so that all eligible funds aggregate to receive the appropriate rate. Securities held in the account fall under the protective umbrella of the Securities Investor Protection Corporation (SIPC). SIPC does not shield investor assets from inherent risk but rather protects those assets from the financial failure of the brokerage firm itself.

Along with typical check writing services, the account offers worldwide access to Bank of America automated teller machines (ATM) without transaction fees. Bill payment services, fund transfers, and wire transfers are available. The MyMerrill app allows users to access the account and perform a number of basic functions via a mobile device.

Accounts with more than $250,000 in eligible assets sidestep both the annual $125 fee and the $25 assessment applied to each sub-account held.

Frequently Asked Questions

The Bottom Line

Asset management firms provide the service of buying and selling assets on behalf of their clients. There are many types of asset managers, with some working for family offices and wealthy individuals and others working on behalf of major banks and institutional investors.