Yes, FHA Loans Can Be Assumed

During the past six years nearly 30,000 FHA loans have been assumed, a strategy which could help a lot of people buy and sell houses.

In fact, FHA assumption activity is on the rise, with annual totals in 2011 several times greater than just a few years ago.

It used to be that mortgages were “freely” assumable. If your home was financed you could sell it and also pass along the mortgage. The new borrower would get financing at the old rate and terms, often a significant advantage as markets changed.

Annual FHA Assumption Levels
Year Assumed Loans
2007 2,369
2008 2,436
2009 3,229
2010 7,561
2011 9,367
2012 (thru 6/30) 4,446
Total 29,408
Source: HUD, OurBroker.com

Historically, one reason to assume mortgages has been to get a loan with a lower rate. However, with mortgage rates now at or near record lows that reason does not apply.

Another issue concerns closing costs. As FHA loans get older their balances decline. That means the gap between the selling price and the remaining loan balance has generally gotten larger over time, but with home prices generally down across the country since 2007 there are cases where an FHA assumption can be done with less down than in a fast-rising market.

When a fixed mortgage is assumed the borrower is picking up the loan further in the amortization schedule. This means more of each payment is devoted to principal and less to interest.

Lastly, it’s been widely reported that even qualified borrowers are unable to get new loans. For this reason an assumption may simply be a more actionable choice.

Today there new few if any freely assumable loans available. Instead we have “qualified” assumptions, an expression which means the lender has the right to prevent an unqualified borrower from assuming a loan. Seen the other way, only an individual with adequate financial capacity, solid credit and lender approval can assume a loan.

“You can assume an existing FHA-insured loan, or, if you are the one deciding to sell, allow a buyer to assume yours,” says HUD. “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.”

Assumption Rules

In the case of the FHA, assumption rules vary according to when the loan was originated. For instance:

  • FHA loans originated prior to December 1, 1986 are freely assumable.
  • Qualified assumptions allowed for FHA mortgages originated from 12-1-86 thru 12-14-89: provided the loan has been outstanding at least at year for owner-occupants and two years for investors.
  • No investor assumptions are allowed for FHA loans originated after 12-14-89.
  • Lender assumption fees are limited to $500.
  • “Some mortgages,” says HUD, “executed between December 1, 1986 and February 5, 1988, contain a requirement for creditworthiness review that is not enforceable. Mortgages from this period are freely assumable despite any restrictions stated in the mortgage.”

Release of Liability

When an FHA loan is assumed the replacement borrower takes over the monthly payments. However, the original borrower — the home seller — may remain responsible for the debt. It’s important with assumptions to get a release of liability, something for which the seller must ask. The liability release form will vary according to the state where the property is located.

Speak with lenders for details and specifics

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