Are FHA mortgage loans freely assumable?

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.

Freely Assumable: 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.

For instance:

  • 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.

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