Are Conventional Loans Assumable? Due-on-Sale Rules
Most conventional loans cannot be assumed because of the due-on-sale clause. The nine federal exemptions, Fannie Mae's ARM exception, and its fee schedule.
The short answer
Generally, no. A conventional mortgage, meaning one outside the VA, FHA, and USDA programs, typically contains a due-on-sale clause, and federal law lets the lender enforce it. When the home is sold, the lender can demand the entire remaining balance, so the loan does not pass to the buyer the way an approved VA, FHA, or USDA assumption does.
There are two narrow exceptions, and both get misread:
- Certain transfers that federal law shields from the clause, mostly within a family. These stop the lender from calling the loan due. They do not, on their own, make the new owner a borrower.
- Adjustable-rate loans owned or backed by Fannie Mae, which its Servicing Guide, with listed exceptions, authorizes servicers to transfer to a creditworthy buyer.
A typical fixed-rate conventional loan falls into neither group. The sections below go through the law, the exemptions, the Fannie Mae rule, and what a conventional assumption costs when one is allowed.
What a due-on-sale clause actually says
The federal statute that governs these clauses, 12 U.S.C. 1701j-3, defines a due-on-sale clause in subsection (a)(1) as "a contract provision which authorizes a lender, at its option, to declare due and payable sums secured by the lender's security instrument if all or any part of the property, or an interest therein, securing the real property loan is sold or transferred without the lender's prior written consent."
Three parts of that definition do most of the work:
- "At its option." The clause gives the lender a right, not a duty. Whether the lender uses it is a decision made under the loan contract.
- "All or any part of the property, or an interest therein." The trigger is not limited to an outright sale. Transferring part of the ownership, or an interest in the home, can be enough.
- "Without the lender's prior written consent." A transfer the lender approves in writing does not trigger the clause. That consent is exactly what an assumption is.
In a standard home loan, the clause usually appears in the section of the mortgage or deed of trust that deals with transfer of the property. The specific wording varies by lender and by form, and the documents for an individual loan control.
What Garn-St Germain did in 1982
Before 1982, a number of states limited when lenders could enforce these clauses. The Garn-St Germain Depository Institutions Act of 1982 settled the question at the federal level. Subsection (b)(1) of the codified statute provides that, "Notwithstanding any provision of the constitution or laws (including the judicial decisions) of any State to the contrary, a lender may, subject to subsection (c), enter into or enforce a contract containing a due-on-sale clause with respect to a real property loan."
Subsection (c) was a transition rule for loans made or assumed in those states in the years before October 15, 1982. It ran on a three-year clock from that date and has no practical effect on loans written since.
Two other parts of subsection (b) matter for anyone hoping a lender will agree to an assumption:
- The contract governs. Under (b)(2), except as subsection (d) provides, the lender's exercise of the clause "shall be exclusively governed by the terms of the loan contract."
- Assumptions are encouraged, not required. Under (b)(3), "a lender is encouraged to permit an assumption of a real property loan at the existing contract rate or at a rate which is at or below the average between the contract and market rates, and nothing in this section shall be interpreted to prohibit any such assumption."
Encouragement is not an obligation. A lender or servicer that declines an assumption on a conventional loan is acting within the statute.
The nine transfers that cannot trigger the clause
Subsection (d) is the part most people mean when they mention Garn-St Germain. It applies to "a real property loan secured by a lien on residential real property containing less than five dwelling units, including a lien on the stock allocated to a dwelling unit in a cooperative housing corporation, or on a residential manufactured home." For those loans, the lender "may not exercise its option pursuant to a due-on-sale clause upon" any of the following:
| Paragraph | Statutory wording | A common example |
|---|---|---|
| (d)(1) | "the creation of a lien or other encumbrance subordinate to the lender's security instrument which does not relate to a transfer of rights of occupancy in the property" | The owner takes out a second mortgage or home equity line behind the first loan |
| (d)(2) | "the creation of a purchase money security interest for household appliances" | Financing a refrigerator or washing machine, secured by the appliance itself |
| (d)(3) | "a transfer by devise, descent, or operation of law on the death of a joint tenant or tenant by the entirety" | One joint owner dies and the surviving joint owner takes full title |
| (d)(4) | "the granting of a leasehold interest of three years or less not containing an option to purchase" | Renting the home out on a two-year lease with no purchase option |
| (d)(5) | "a transfer to a relative resulting from the death of a borrower" | A daughter inherits the house when her father dies |
| (d)(6) | "a transfer where the spouse or children of the borrower become an owner of the property" | The borrower adds a spouse or child to the title during the borrower's lifetime |
| (d)(7) | "a transfer resulting from a decree of a dissolution of marriage, legal separation agreement, or from an incidental property settlement agreement, by which the spouse of the borrower becomes an owner of the property" | A divorce decree awards the home to the borrower's spouse |
| (d)(8) | "a transfer into an inter vivos trust in which the borrower is and remains a beneficiary and which does not relate to a transfer of rights of occupancy in the property" | The borrower moves the home into a living trust for estate planning |
| (d)(9) | "any other transfer or disposition described in regulations prescribed by the Federal Home Loan Bank Board" | Transfers added by regulation; the Board was later abolished and its functions transferred, as the statutory notes on the same page record |
The limits are in the wording. A lease longer than three years, or one with a purchase option, falls outside (d)(4). A sale to a sibling, a cousin, or a friend while the borrower is alive fits none of the paragraphs, because (d)(5) covers relatives only on a borrower's death and (d)(6) covers only a spouse or children. A trust in which the borrower stops being a beneficiary falls outside (d)(8). And the whole subsection applies only to residential property with fewer than five dwelling units.
What the exemptions do not do
A protected transfer stops the lender from accelerating the loan. It does not change who owes the money.
The Consumer Financial Protection Bureau addressed this in a July 2014 interpretive rule on successors in interest. It describes a successor as "a person who receives legal interest in a property, typically by a transfer from a family member, by operation of law upon another's death, or under a divorce decree or separation agreement," and states that in those situations "the successor is not personally liable for the associated debt, but may choose to assume the debt." It adds that Garn-St Germain "prohibits the creditor from exercising a due-on-sale clause based upon certain types of transfers, including the common situation of transfer upon death of a relative," and that "Even where a due-on-sale clause may be exercised, however, creditors may agree to add the successor as a named obligor under the loan contract."
The rule's actual holding is narrower. When a successor who already holds title is added as an obligor, or substituted for the existing one, the CFPB concluded that the creditor's written acknowledgment is not an "assumption" as Regulation Z defines it, so the federal ability-to-repay rule does not apply to that step.
Put together:
- The people who signed the note remain the obligors until the loan is paid off or a formal assumption replaces or releases them.
- The new owner can live in the home and make payments without being a borrower, but has no contractual relationship with the lender unless one is created.
- Formally taking over the debt is a separate step that the servicer has to agree to. Assuming a mortgage from a family member covers how those two routes differ, and assuming a VA loan after divorce covers the divorce case on a VA loan.
The Fannie Mae exception for adjustable-rate loans
The one broad opening on the conventional side is in Fannie Mae's Servicing Guide, section D1-4.2-02. It states that "The servicer is authorized to allow transfers of ownership" on "All ARMs and GPARMs, except for the following":
- loans closed under ARM Plans 975, 1029, and 1103;
- ARMs with extended fixed-rate periods, if the transfer would take place during the fixed-rate period; and
- ARMs "that have been converted to fixed-rate mortgage loans."
The same section extends the authority to a narrow group of older fixed-rate portfolio loans that Fannie Mae bought under commitment contracts dated before November 10, 1980, subject to conditions. Those loans are now decades old.
Being on the list is not enough by itself. To approve the transfer, the servicer has to find that "The purchaser's credit and financial capacity are acceptable under Fannie Mae's current underwriting guidelines," and, where the loan has mortgage insurance, that "The mortgage insurer approves the transfer and the mortgage insurer's specified conditions are satisfied."
Three further details in the section:
- Second liens do not come along. The guide states that "second lien mortgage loans are not assumable under the existing terms," and directs the second-lien servicer to advise the parties that the second lien "will be accelerated if the transfer takes place," even when Fannie Mae allows the first lien to be assumed.
- An unapproved transfer is enforced. If the transfer is not approved and happens anyway, "the servicer must take all steps necessary to enforce the due-on-sale (or due-on-transfer) provision," and must start foreclosure proceedings if the payoff is not received after acceleration.
- Release depends on the paperwork. The guide refers to "the assumption (or assumption and release) agreement." Whether the seller is released from the debt depends on which of the two is signed.
The guide describes an approved first lien as assumed "under its existing terms," and on an adjustable-rate loan those terms include the future rate adjustments in the note. A buyer taking over an ARM inherits the adjustment schedule along with the current rate.
Fannie Mae's guide governs only loans that Fannie Mae owns or backs. Loans held by other investors follow those investors' rules and the loan contract, which this page does not cover.
What a conventional assumption costs
Fannie Mae's Servicing Guide, section A2-3-05, says that for "transfers of ownership, assumptions, and releases of liability of conventional mortgage loans" the servicer "must limit the assumption fee." Out-of-pocket costs for processing the transaction, such as the credit report, may be charged at actual cost. The guide then lists a fee schedule it considers reasonable, and expects lower fees where a servicer's costs do not justify these:
| Situation | Fee Fannie Mae considers reasonable |
|---|---|
| The transfer does not require a review of the buyer's credit | $100 |
| The transfer requires credit approval of the buyer, or a release of liability is requested | The greater of $400 or 1% of the unpaid principal balance, up to a maximum of $900 |
The arithmetic is simple. On a $250,000 balance, 1% is $2,500, so the $900 maximum applies. On a $30,000 balance, 1% is $300, so the $400 floor applies. The same section points FHA and VA loans to those programs' own limits on assumption fees, which costs and fees of assuming covers on the VA side.
Where this leaves a buyer looking for a low assumed rate
The conventional exceptions are real but narrow. Family transfers keep a loan in place without changing who owes it, and the Fannie Mae authority mostly reaches adjustable-rate loans, whose rate does not stay fixed. Neither is a reliable source of a low fixed rate that a buyer can take over.
That is why discussion of assumable mortgages centers on government-backed loans, where assumption is written into the program rules. Which mortgages are assumable sets the loan types side by side, is my mortgage assumable? covers how to find out what program a specific loan belongs to and how to ask the servicer in writing, and are VA loans assumable? covers the program behind most assumable listings. Current VA assumable homes are on VAssumable listings.
Loan contracts, investor rules, and servicer practices vary, and the documents for an individual loan govern over any general description, including this one. This is educational information, not financial, legal, or lending advice.
Common questions
- Are conventional loans assumable?
- Generally no. Conventional loans typically carry a due-on-sale clause, and 12 U.S.C. 1701j-3 lets a lender enforce it, so a sale of the home lets the lender demand the full balance. The exceptions are narrow: certain transfers the statute shields from the clause, such as a transfer to a spouse or children, and Fannie Mae adjustable-rate loans, other than listed exceptions, which its Servicing Guide lets a servicer transfer to a creditworthy buyer.
- What is a due-on-sale clause?
- Federal law defines it as a contract provision that lets the lender, at its option, declare the loan due and payable if all or part of the property, or an interest in it, is sold or transferred without the lender's prior written consent. It is the reason a typical conventional loan does not follow the house to a new owner.
- Which transfers cannot trigger a due-on-sale clause?
- On a home with fewer than five dwelling units, 12 U.S.C. 1701j-3(d) bars the lender from exercising the clause over nine kinds of transfer. They include a transfer to a relative after a borrower's death, a transfer on the death of a joint tenant, a transfer in which the borrower's spouse or children become owners, a transfer to a spouse under a divorce decree or legal separation agreement, a transfer into a living trust in which the borrower remains a beneficiary, a subordinate lien, and a lease of three years or less with no purchase option.
- Is a relative who inherits a home with a mortgage liable for the loan?
- Not automatically. In a 2014 interpretive rule, the CFPB said that a successor who acquires property subject to a mortgage is not personally liable for the associated debt but may choose to assume it. The same rule notes that Garn-St Germain bars the lender from calling the loan due over certain transfers, including the common case of a transfer on the death of a relative.
- Can a Fannie Mae adjustable-rate loan be assumed?
- In many cases. Fannie Mae's Servicing Guide authorizes servicers to allow transfers of ownership on all ARMs and GPARMs except ARM Plans 975, 1029, and 1103, ARMs with extended fixed-rate periods while the fixed period is running, and ARMs that have been converted to a fixed rate. The buyer's credit and financial capacity have to be acceptable, and the mortgage insurer has to approve where there is one.
- How much can a servicer charge to process a conventional assumption?
- For Fannie Mae loans, the Servicing Guide requires servicers to limit the assumption fee and lists a schedule it considers reasonable: $100 when the transfer needs no review of the buyer's credit, or the greater of $400 or 1% of the unpaid principal balance, up to $900, when the transfer needs credit approval or a release of liability is requested. Out-of-pocket costs such as the credit report can be charged at actual cost.
Educational information only. This article is general information about how mortgage assumptions work, it is not financial, legal, lending, or tax advice. Loan terms, fees, and rules vary by lender, loan servicer, and state, and can change over time. Confirm the specifics of your situation with the appropriate licensed professionals.