What Is an Assumption Fee? Definition and Examples

An assumption fee is a specific charge encountered in certain financial transactions. This fee is levied when one party takes over an existing financial obligation from another. It represents a cost associated with the transfer of responsibility for a loan or contract.

Defining Assumption Fees

An assumption fee is a charge imposed by a lender or original party when someone takes over the financial obligations of an existing loan, lease, or contract. This fee is distinct from the principal of the underlying financial obligation itself. Lenders charge assumption fees to cover the administrative costs associated with processing the transfer. These costs include assessing the new party’s creditworthiness and modifying existing agreements to reflect the change in responsibility. The fee helps compensate the lender for the resources and time required to facilitate the assumption and ensure the new party is qualified.

Common Contexts for Assumption Fees

Assumption fees are most frequently encountered in real estate transactions, particularly with certain types of mortgages. Loans backed by government agencies, such as those from the Federal Housing Administration (FHA), Department of Veterans Affairs (VA), and U.S. Department of Agriculture (USDA), are typically assumable. This means a buyer can take over the seller’s existing mortgage, including its interest rate and remaining balance, rather than obtaining a new loan. For instance, assuming an existing FHA mortgage can offer significant savings if the original interest rate is lower than current market rates.

Car leases also represent a common context where assumption fees may apply. Individuals can assume an in-process car lease from another party, fulfilling the remaining terms of the contract. Some business loans and commercial real estate financing, such as certain HUD multifamily loans or CMBS loans, can also be assumable, often involving a fee for the transfer.

Determining and Paying Assumption Fees

Assumption fees are typically determined either as a flat fee or as a percentage of the outstanding balance of the financial obligation being assumed. For example, a lender might charge a fixed amount, such as $1,000, or a percentage like 1% of the remaining loan balance. The exact amount and structure of the fee can vary based on the specific type of loan or contract, the lender’s policies, and the terms of the assumption agreement.

In the context of mortgages, FHA loan assumption fees were recently increased to a maximum of $1,800. VA loan assumptions typically involve a base processing fee of $250 or $300, plus a 0.5% funding fee of the loan balance paid to the VA. USDA loan assumption fees can range from $300 to $500 or more. These fees are generally paid by the party assuming the loan, often as part of the closing costs or transfer fees associated with the transaction.