How to Take Over a Loan From Someone Else

Loan assumption allows a new borrower to take over an existing loan’s financial obligations, including the remaining balance, interest rate, and terms. This offers an alternative to securing a new loan. Lender approval is mandatory, as the financial institution must assess the new borrower’s ability to repay the debt.

Understanding Loan Assumption

Loan assumption formally transfers an existing loan’s responsibilities, including its interest rate, remaining term, and payment schedule, from the original borrower to a new one. The original borrower is typically released from liability once the assumption is complete. This differs from refinancing, which involves obtaining a new loan, and co-signing, where responsibility is shared. In an assumption, the new borrower fully replaces the original.

Government-backed mortgages, such as Federal Housing Administration (FHA) and Department of Veterans Affairs (VA) loans, are generally assumable if the new borrower meets eligibility criteria. Conventional mortgages are less commonly assumable due to “due-on-sale” clauses. These clauses grant the lender the right to demand full repayment of the loan balance when the property is sold or transferred, effectively preventing assumption unless specific exceptions apply.

Auto and personal loans are rarely assumable. Auto loan contracts often prohibit such transfers, and lenders typically require a new loan or refinance to change the responsible party for a vehicle. Personal loans are generally unsecured and based on the individual creditworthiness of the original borrower, making them unsuitable for assumption by another party. Lender approval is always required for any loan assumption.

Preparing for Loan Assumption

Before applying, the new borrower must gather information and meet financial qualifications. Lenders assess financial stability using criteria similar to a new loan, including credit scores, debt-to-income (DTI) ratios, and stable employment and income. Credit score requirements vary by loan type and lender.

For FHA loan assumptions, a credit score of at least 580 is generally required, though some lenders prefer a score of 620 or higher. VA loans also require an acceptable credit score. DTI ratios are a significant factor; FHA guidelines allow for a back-end DTI of up to 56.9% for borrowers with credit scores of 620 or above, but this limit can drop to 43% for lower scores. VA loans have no maximum DTI set by the VA, but lenders may apply additional scrutiny if the ratio exceeds 41%. Conventional loans often prefer a DTI of 36%.

To demonstrate eligibility, the new borrower provides documents like pay stubs, W-2 forms, federal tax returns, bank statements, and identification. An authorization for a credit history check is also standard. These documents allow the lender to thoroughly review the applicant’s financial standing and confirm their capacity to manage the assumed loan’s payments.

The prospective borrower also needs detailed information about the existing loan from the current borrower. This includes the outstanding balance, remaining term, interest rate, and payment history. For mortgage assumptions, inquire about any existing liens on the property. Clear communication between both parties is essential to gather these details.

Executing the Loan Assumption

To execute the loan assumption, contact the existing lender to request their assumption application package. Submit the completed package, including all financial documents, to the lender. This submission can typically be done through an online portal, via mail, or in person, depending on the lender’s procedures. The application itself will require detailed personal and financial information, but the focus at this stage is on providing the comprehensive, pre-gathered documentation.

The lender will then review the application, underwriting the new borrower, conducting credit checks, and verifying income and employment. For mortgage assumptions, a property appraisal may be required. This review phase can take several weeks to a few months, with an average timeline of 45 to 90 days. VA loans have a mandated approval timeline of 45 days.

Once approved, the final steps involve signing new loan documents and addressing associated fees. Typical fees include an assumption fee, which can range from 0.5% to 1% of the outstanding loan balance or be a flat fee (e.g., up to $1,800 for FHA loans, up to $300 for VA loans). Other closing costs may include processing, title, recording, and credit report fees.

For mortgage assumptions, the new borrower often pays the original borrower for their accumulated equity, typically with cash or separate financing, as the assumed loan only covers the remaining balance. The formal transfer of responsibility is then recorded, and the original borrower is generally released from liability, completing the assumption.