Assumable Mortgages in Texas: How a Formal Loan Assumption Works

An assumable mortgage lets a buyer step into the loan you already have instead of taking out a new one. The buyer takes over the balance, the rate and the remaining payments. In a formal assumption, the loan servicer, and for some loans a federal agency, approves the buyer first. That approval is what separates an assumption from a buyer simply making your payments.

This guide covers the FHA, VA and USDA rules, release of liability, VA entitlement and the Texas contract forms. For county records, tax lookups and local help in Tarrant, Dallas, Collin or Denton County, see the DFW version of this guide.

What a formal assumption is

The buyer applies to your servicer. The servicer, and sometimes the agency behind the loan, checks the buyer's credit and approves the transfer. The buyer signs an agreement to repay the debt. After closing, the buyer owns the house and pays your old loan.

That differs from a subject-to deal, where the buyer takes title while your loan stays in your name without lender approval. Our guide on whether someone can take over your payments compares the options.

Not every loan can be assumed. TREC's Loan Assumption Addendum warns that a note or deed of trust may contain a "due on sale" clause, and that a noteholder who does not consent may be able to call the whole balance due. Your own loan documents control. FHA, VA and USDA loans each have written federal assumption rules, so most of this guide is about them.

FHA loans: a credit review first

HUD calls its policy for FHA-insured loans "free assumability." Under 24 CFR 203.512, a lender may not restrict assuming an FHA loan unless HUD's rules allow it. Where the mortgage requires approval, the lender may not approve the sale unless at least one buyer is found creditworthy under HUD standards. Narrow exceptions exist, such as a transfer by will or inheritance.

• Occupancy. The lender may not approve a sale to someone who cannot be approved as a substitute borrower because the home will not be a primary residence or a permitted secondary residence.
• No approval. FHA mortgages contain a due-on-sale clause. If the house is transferred without required approval, the lender asks HUD for permission to accelerate the loan, and must accelerate if HUD agrees and the law allows it.

The due-on-sale part covers mortgages from applications dated on or after December 1, 1986. If your loan is older, ask your servicer which rules apply.

FHA release of liability: in writing, or after five years

Under 24 CFR 203.510, the lender releases the selling borrower from personal liability when someone requests a creditworthiness review of the buyer, the buyer is found creditworthy, the buyer agrees to pay the debt, and the lender issues a release on a HUD-approved form.

If no review is requested, or the buyer is not approved, there is a fallback for loans from applications dated on or after December 1, 1986. You are released automatically once the buyer has assumed personal liability, five years have passed since the assumption, and the buyer is not in default at the end of that period. The lender must give you a written release when you ask.

VA loans: a current loan and a qualified buyer

VA home loans are covered by 38 U.S.C. 3714, which applies to loans with commitments made on or after March 1, 1988. Those loans must carry a notice that the loan is not assumable without the approval of the Department of Veterans Affairs or its authorized agent.

If you notify the loan holder in writing before you sell, the assumption is to be approved, and you are relieved of further liability to VA on the loan, when the holder finds that:

• the loan is current;
• the buyer is bound by contract to buy the house and take on full liability for the balance and all of your obligations under the loan documents; and
• the buyer qualifies on credit as if the buyer were an eligible veteran borrowing that balance.

The buyer does not have to be a veteran, only to qualify as one would. If the holder says the loan is not current or the buyer does not qualify, it must tell you and VA, and tell you that you may appeal to VA. The law also directs VA to cap what a lender may charge to process an assumption.

VA entitlement: read this twice

Entitlement is the VA home loan benefit a veteran uses when VA backs a loan. When a buyer assumes your VA loan, the loan keeps running, so the entitlement you used can stay tied up and affect your next VA loan.

Under 38 U.S.C. 3702(b), VA may restore used entitlement in set situations. Two matter most in a sale:

• The home was sold and the loan was repaid in full, or VA was released from liability on it.
• A veteran buyer assumes the balance and agrees to use the buyer's own entitlement, in the amount yours was used, in place of yours, and otherwise meets the program's requirements. This is often called substitution of entitlement.

TREC's release addendum puts it plainly: VA will not restore your entitlement unless the buyer is a veteran, has enough unused entitlement and is otherwise qualified. VA or your servicer can tell you where you stand.

USDA loans: Rural Development must approve

Loans backed by USDA Rural Development follow 7 CFR 3555.256. The lender must get the agency's approval before consenting to a transfer with an assumption. The conditions include:

• the buyer takes on the entire debt and meets the program's eligibility rules;
• the house meets the program's site and dwelling standards, or is brought up to them first;
• the rate may not exceed the rate on the original loan;
• a new fee, figured on the remaining principal, is paid to Rural Development; and
• the lender submits a written request showing the buyer's creditworthiness and income eligibility.

Two lines stand out. The rule says the seller must remain personally liable when the loan is assumed. And if the house is transferred with the lender's knowledge but the buyer does not assume the debt, Rural Development will void its backing of the loan, apart from limited exceptions in the rule.

The Texas contract: TREC's Loan Assumption Addendum

In a Texas resale, the assumption goes into the TREC contract, No. 20-19. Paragraph 3B totals the financing in any attached addendum, and the Loan Assumption Addendum is one of its boxes. That addendum is TREC No. 41-3, which TREC lists as effective February 1, 2023.

• Credit documents (A and B). The buyer delivers items such as a credit report and employment verification within the days filled in. If they are late, the seller may terminate and the earnest money goes to the seller. If the seller finds the credit unacceptable, the seller has 7 days after the deadline or actual delivery, whichever is later, to terminate, with the earnest money refunded to the buyer. Silence counts as approval.
• The loans (C). The form lists each note, its expected balance and payment. If the closing balance differs, the cash due or the price adjusts. Within 7 days after the effective date, the seller gives the buyer copies of the notes, deeds of trust and latest loan statements.
• Loan terms (D). The buyer may terminate if the noteholder wants an assumption fee above the amount written in and the seller will not pay the excess, raises the rate above the stated cap, or changes the loan documents in any other way.
• No consent (E). If the noteholder does not consent, either side may terminate and the buyer's earnest money is refunded.
• Seller's lien (F). Unless the seller is released from liability, a vendor's lien and deed of trust to secure the assumption are required; the vendor's lien is automatically released when the noteholder's executed release is delivered.
• Escrow (G). Any tax and insurance escrow moves to the buyer with no shortage, and the buyer reimburses the seller for its balance.

The release and VA entitlement addendum

TREC No. 12-3, the Addendum for Release of Liability on Assumed Loan and/or Restoration of Seller's VA Entitlement, has two parts. In part A, seller and buyer apply within the days filled in for the seller's release from a conventional lender, from VA and the VA lender, or from FHA and the FHA lender. In part B, they apply to VA to restore the seller's entitlement.

For each part you check one box for what happens if approval has not come by closing: the contract ends and the buyer's earnest money is refunded, or the missing approval does not delay closing. Under the second box, you can close while still liable. The addendum puts the cost of release and restoration on the seller, and paragraph 12A(1)(a) of the 20-19 contract lists "release of Seller's loan liability" as a seller expense.

Questions to settle first

1. Ask your servicer, in writing, whether the loan is assumable and what its process and fees are.
2. Ask whether it will release you, and what it needs to do so.
3. If you are a veteran, ask whether the buyer will substitute entitlement before closing.
4. Know your equity. The buyer takes over the balance; the rest of the price is paid in cash under paragraph 3A or with other financing.
5. Have a Texas real estate attorney review the addenda for your facts, and a CPA review tax questions. A HUD-approved housing counselor can also walk through options.

If you would rather sell and pay off the loan

An assumption waits on a servicer and sometimes an agency. Some owners would rather sell for cash and have the loan paid in full from the sale. When Cash Home Advisors buys a house, we pay all closing costs and can close in 7–14 days. Your payoff goes to your lender at the title company, and you see the closing statement before you sign.

You can request a cash offer, read how our process works, or see our guide to Texas closing costs. If payments are behind, read about selling before a Texas foreclosure, or browse more financing guides.

Frequently asked questions

Sources

1. Texas Real Estate Commission, Loan Assumption Addendum, TREC No. 41-3 (PDF)
2. Texas Real Estate Commission, Loan Assumption Addendum form page (effective date)
3. Texas Real Estate Commission, Addendum for Release of Liability on Assumed Loan and/or Restoration of Seller's VA Entitlement, TREC No. 12-3
4. Texas Real Estate Commission, One to Four Family Residential Contract (Resale), TREC No. 20-19
5. 24 CFR 203.510, Release of personal liability (FHA)
6. 24 CFR 203.512, Free assumability; exceptions (FHA)
7. 38 U.S.C. 3714, Assumptions; release from liability (VA)
8. 38 U.S.C. 3702, Basic entitlement (VA restoration of entitlement)
9. 7 CFR 3555.256, Transfer and assumptions (USDA Rural Development)

General information, not legal or tax advice. Talk to a Texas attorney or CPA about your situation.

Related guides

• Selling a House Subject To the Mortgage in Texas: What Stays on You
• Can Someone Take Over My Mortgage Payments in Texas?