In tough times is it true that FHA loans are assumable?
You see spread across the Internet a resounding “yes” when the question of FHA mortgages and assumptions is raised.
Unfortunately, a flat “yes” is not the whole story. FHA loans are not freely assumable; that is, a buyer cannot take over an existing mortgage without lender permission. Instead, the FHA — like everyone else — only offers qualified assumptions. That means you can assume a loan but only if you’re qualified. Who determine if you’re qualified? The lender working from FHA standards.
The quickie answer from HUD is this:
“You can assume an existing FHA-insured loan, or, if you are the one deciding to sell, allow a buyer to assume yours. Assuming a loan can be very beneficial, since the process is streamlined and less expensive compared to that for a new loan. Also, assuming a loan can often result in a lower interest rate. The application process consists basically of a credit check and no property appraisal is required. And you must demonstrate that you have enough income to support the mortgage loan. In this way, qualifying to assume a loan is similar to the qualification requirements for a new one.”
Translation: Nope, FHA loans are not freely assumable. New borrowers need to be checked for creditworthiness and even among creditworthy borrowers not all will qualify.
What HUD Really Says
The reality is that assuming an FHA loan is not just a “yes” or “no” deal. HUD has 12 pages of assumption regulations and there’s lots of fine print.
- Mortgages originated before December 1, 1986, generally contain no restrictions on assumptions. Such loans are now more than two decades old, so it’s likely that few if any remain outstanding.
- Mortgages originated on or after December 15, 1989 also contain restrictions on assumptions when the assumptor will not occupy the home as a principal residence.
- The new borrower must be creditworthy according to current HUD standards.
- The new borrower must qualify for financing even when taking title to the property “subject to” the mortgage without assuming personal liability for the debt.
- Lenders must not approve an assumption unless the property is a primary or secondary residence or a secondary.
- Under the Cranston-Gonzalez National Affordable Housing Act Of 1990, HUD cannot insure a mortgage for a secondary residence and prohibits the assumption of an FHA mortgage made after January 27, 1991 on property intended for use as a secondary residence except for certain hardship exceptions.
- Each mortgage must contain a due-on-sale clause permitting acceleration. If a sale or other transfer
occurs without mortgagee approval the lender must demand immediate and full repayment of the loan.
- A.The lender must release the seller from the liability of repaying the mortgage if there has been a satisfactory creditworthiness check for the new borrower and the prospective purchaser assumes personal liability to repay the loan.
For additional details and the latest updates, please speak with FHA lenders and local real estate brokers.