Covering the equity gap

When you assume a loan you take over its remaining balance, not the sale price. The difference — the seller's equity — has to be paid at closing. That “equity gap” is often the biggest hurdle in an assumption.

Option 1: Cash

The simplest route is paying the gap from savings or other funds you're allowed to use. On an FHA assumption the buyer isn't required to put in any minimum cash investment (HUD Handbook 4000.1), but the seller still has to be paid whatever you agree on above the balance. FHA lets the seller or other interested parties contribute toward the buyer's actual closing costs within FHA's limits (HUD Handbook 4000.1) — that helps with fees, not the equity itself.

Option 2: A second loan (junior lien)

Some buyers borrow the gap with a second mortgage behind the assumed loan. The rules depend on the loan program:

• VA: VA “does not prohibit an assumer (regardless of whether a Veteran)” from getting a junior lien with an assumption (VA Circular 26-24-17). The servicer must make sure the second is subordinate to the VA loan (for example, with a subordination agreement) and document its lender, amount and terms. The money can pay allowable closing costs or amounts due the seller — no cash back to the buyer. The second loan's payment counts in the buyer's debt ratios, its rate may be higher than the VA loan's, and it should have a reasonable grace period before late charges or foreclosure. If the second isn't assumable, that could make it harder to sell by assumption later.
• USDA: the existing loan's lien priority “must be maintained or improved,” and if more financing is needed to complete the assumption or make repairs, USDA may approve a supplemental guaranteed loan (7 CFR § 3555.256).
• FHA: the Handbook 4000.1 assumption sections we reviewed don't spell out how a new second lien is handled on an assumption. Ask the servicer in writing whether it will accept subordinate financing and what it needs.

Option 3: Negotiate the terms

Price, closing date and who pays which allowed costs are between the buyer and seller. On VA assumptions, for example, the seller may pay real estate commissions (Circular 26-23-10 Change 1). An agent or real estate attorney can help you structure the offer.

Questions to ask any second-lien lender

• Have you closed seconds behind assumptions with this specific servicer?
• Who prepares the subordination agreement, and how long does it usually take?
• What is the rate, term, payment and total cost? Is there a balloon payment?
• Is your loan assumable if I sell by assumption later?
• What grace period applies before late fees or foreclosure?

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