What Happens When You Assume

Kevin A. Park
U.S. Department of Housing and Urban Development

The views expressed in this article are those of the author and do not represent the official positions or policies of the Office of Policy Development and Research, the U.S. Department of Housing and Urban Development, or the U.S. Government.

Mortgage assumption allows borrowers to transfer both their property and their mortgage to a homebuyer. Assumption of a loan has value when the note rate is below prevailing market rates. This paper uses survival analysis to estimate the likelihood of assumption and the effect of assumption on the likelihood of default. The author finds that every additional $1,000 in assumption value is associated with a nearly 2-percent increase in the likelihood of assumption. Assumption is more likely when the existing homeowner is seriously delinquent and when housing markets are weak. Assumption subsequently lowers by 20 to 40 percent the risk that a loan will default relative to loans that are not assumed. As mortgage rates rise from recent historic lows, mortgage assumption may become more common.