Are FHA Loans Assumable?
FHA loans are extremely popular for individuals who may may not qualify for a conventional loan, or for those who are interested in one of the loan programs that are unique to FHA. They also typically have lower interest rates which is why some home buyers would like to assume the seller’s FHA loan.
Are FHA Loans Assumable?
According to the Department of Housing and Urban Development (HUD), all FHA-insured loans are assumable if the new borrower can qualify for the loan and the existing loan has no restrictions placed on it.
In a recent call with HUD, one of their counselers responded with the following quote:
Yes, FHA loans are assumable, meaning a homebuyer can take over the seller’s existing FHA loan, including its interest rate and terms.
In our continuted conversation, she also provided the following details which are summarized:
This can be a major advantage in a high-rate market, as buyers may secure a lower rate than what’s currently available. To assume an FHA loan, the buyer must meet lender requirements, including a credit check and financial verification, and receive approval from the loan servicer
Right now, you may have questions regarding FHA assumable loans and how to acquire them. This article will outline everything you need to know about FHA assumable loans and how they work.
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How does an FHA Assumable Mortgage Work? 
An FHA assumable mortgage requires a credit score of at least 600 (as opposed to a conventional loan which must be seven hundred or higher). Mortgage insurance ‘for life’ is mandatory, unless you assume a loan that was created prior to this requirement being implemented. A debt-to-income ratio of 43% (or less) is also mandated. So, for example, if you earn $5000 per month, your mortgage (or debt payment) cannot exceed $2,150.
The concept behind an assumable mortgage is quite simple. Basically, it allows the home buyer to take over the mortgage of the seller, as long as the mortgage lender approves it. For example, if the seller has an assumable mortgage of $100,000 but the house is selling for $150,000, then the buyer will need to come up with an additional $50,000 to purchase the home.
It is important to note, however, that even though the buyer has agreed to assume the seller’s mortgage, the lender is entitled to change the terms of the agreement, if necessary. Reasons for this often include the buyer’s credit risk (which includes the possibility of default on a debt) as well as the current market conditions.
This leads us directly into the next topic, which is whether assuming an FHA loan is actually beneficial to the seller as well as the buyer.
Benefits of an FHA Assumable Loan
The only time that it becomes beneficial for both the buyer and the seller is if the current mortgage rates are higher than the loan that will be assumed.
For example, if the home was financed 10 years ago with an FHA loan at a rate of 5%, but now the rates are up to 7%, then assuming the seller’s FHA loan can be beneficial. In this situation, the buyer has an opportunity to buy a home today with the benefit of having yesterday’s lower rate. This rate benefit means the loan assumption brings additional value.
Another benefit is if the original FHA loan was dated prior to July 3rd, 2013, the mortgage insurance premium may be removed once the loan balance drops to 78% of the original purchase price. We suggest reading our article on FHA mortgage insurance premiums to learn more.
The benefit for the seller is he or she may be able to get full price (or more) for the home due to the lower mortgage rate on their loan.
When is an Assumable FHA Loan Bad for the Buyer?
If the home value has increased and/or the seller has paid down quite a bit of the mortgage balance, then the buyer will need a large down payment.
For example, the home originally sold for $100,000 and the loan amount was $96,500. However, now the selling price for the home is $125,000 and the loan balance is $92,000. In this scenario, the buyer would need to come to closing with a down payment of $33,000 which is 26% of the purchase price.
In this scenario above, it probably would not make sense to assume the FHA loan. You have a down payment of more than 20% which means you could qualify for a conventional mortgage with no PMI.
Is an FHA Assumable Loan Bad for the Seller?
FHA assumable loans often benefit the buyer, but do they also benefit the seller? Additional costs can befall the seller with an FHA loan. However, the process, in general, is no more complicated than that of a conventional loan.
The main reason why an FHA loan could pose a problem for the seller would be in the case of the buyer defaulting on the loan. The seller may potentially be liable to the lender for any outstanding debt not recovered. This is obviously something you would verify with the lender prior to moving forward.
Additional costs are incurred by the seller if any extra repairs need to be made. The property serves as collateral for the FHA- assumed loan and therefore must meet specific livability standards. If not, the onus falls upon the seller to do any necessary repairs in order for the home to pass inspection.
The inspection is done by an FHA-approved appraiser, so it is imperative that the seller keep the home in tip-top shape. Failure to do this could delay the close of escrow, possibly resulting in the loss of sale.
How are Loan Escrows Handled?
The current homeowner has an escrow balance held by the lender for taxes and insurance. After closing, this balance will be returned to the seller. Meanwhile, the buyer will be requried to fund their required escrows at closing.
If you are a buyer in this situation, you should plan to fund 3 months of taxes and a full year’s worth of insurance must be paid up front.
FHA Assumable Loan Considerations
As of the current year, an FHA loan allows the borrower up to 96.5% of a home’s value. These loans are assumable only by applicants with a FICO score of at least 600. In this case, the buyer must go through the same approval process he or she would for a new FHA mortgage.
A note of caution, never enter into an agreement whereby someone else can assume your mortgage without a lender. If, for example, the seller allowed the buyer to simply move in and make payments, he or she would essentially become the ‘land lord’, still responsible for the property and, by extension, the mortgage. This would not be considered an assumable mortgage and could have serious financial consequences, so be careful!
FHA Loan Misconceptions
A common misconception with FHA’s involves the idea that once the loan is assumed, the original owner is liable for it. On the contrary the original borrower is not responsible for the balance if the appropriate assumption transfer documentation has been properly completed.
It is important for the new borrower to understand that he or she accepts the terms of the original mortgage as it was written plus the lender has the ability to make changes to the original loan agreement based upon the new borrower’s credit worthiness.
FHA Loans Assumption Closing Costs
There is an additional benefit to assuming FHA loans and that involves closing cost fees. In many instances the lender of an FHA-approved loan will charge a fee which is considerably less than that of a conventional loan.
Most conventional loans require as much as 20% down whereas FHA mortgages require much less – only 3.5%. In addition, the majority of closing costs can also be included in the loan, with the option of paying off some of these costs out-of-pocket.
Top Frequently Asked Questions
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Can I assume an FHA loan with bad credit?
You must meet FHA lender requirements, but credit standards are more flexible than conventional loans. Keep in mind that each lender sets their own credit score criteria. -
Do I need a down payment to assume an FHA loan?
No traditional down payment is required, but you must pay the seller’s equity in the home upfront. This is the difference between the purchase price and remaining loan balance on their mortgage. -
Do I get the seller’s interest rate when assuming an FHA loan?
An FHA loan assumption transfers the existing loan’s interest rate, which can be lower than current market rates. -
Is FHA mortgage insurance still required after assuming the loan?
You must continue paying monthly mortgage insurance (MIP) as per the terms set in the original mortgage. -
How long does it take to complete an FHA loan assumption?
The process can take 30 to 60 days, depending on lender approval and paperwork requirements. What you will find is the request to assume a loan is not common for the lender and therefore may not transition as smoothly as you may expect.
Questions from Home Sellers:
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Will I still be responsible for the loan after it’s assumed?
If the lender formally approves the buyer, you are released from liability. Otherwise, you may remain financially responsible. -
Can I sell my home for more than what I owe on the FHA loan?
You can and should sell the home for more than the outstanding mortgage balance and you would keep all profits minus closing fees. -
Does my FHA loan need to be in good standing to be assumable?
For an FHA loan to be considered for assumption, the FHA loan must be current, with no missed payments or delinquency. -
Will an assumable FHA loan help me sell my home faster?
Homes with assumable low-interest FHA loans are highly attractive to buyers, especially in a high-rate market. However, the lender holding the mortgage must agree to allow the loan to be assumed. -
Are there fees for an FHA loan assumption?
Lenders typically charge an assumption fee, and the buyer may have closing costs.
Conclusion
In conclusion, FHA loans are absolutely assumable if the new borrower meets the FHA loan qualifications. FHA assumable loans can be a viable option for first time home buyers depending upon the scenario which means assuming an FHA loan will not make sense for everyone. Even with the potential for a lower interest rate, you may be better off applying for a new FHA loan.
You can contact a HUD counselor here if you would like to verify the information provided.
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Pros and Cons of Assumable Mortgages – Nerd Wallet