Are FHA Mortgages Still Assumable?
Millions of FHA loans are outstanding and many recent ones have fixed interest rates which are below the mortgage rates of today. So can you assume an FHA loan?
The general answer is "yes" but that's not an automatic "yes." As with anything involving mortgages there are some details to consider.
Freely Versus Qualified Assumptions
FHA mortgages were "freely" assumable for many years, an expression which meant the payments could be taken over by anyone. For instance, Borrower Smith could take over a loan originally taken out by Borrower Jones, no questions asked.
The problem with the freely assumable approach was that the lender didn't know anything about Borrower Jones. It could be that Jones was a wonderful borrower and made every payment, or it could be that Jones made no payments. If Jones didn't make payments then how much responsibility remained with the original borrower? And how easy would it be to collect from Smith, someone who may have moved far, far away?
To deal with such questions the rules were changed in 1989. From that point forward FHA mortgages remained "assumable," but not as assumable as before. Loans issued since 1989 are now "qualified" assumptions, a term which means you can assume an FHA loan -- but only if you qualify and the lender agrees to the assumption.
So what are the qualification requirements? Here are a few:
First, an FHA loan originated after 1989 can only be assumed by an owner-occupant, not an investor.
Second, the lender must approve the assumption. That means the lender gets to look at the financial qualifications of the new borrower. Essentially, the lender has the right to completely underwrite the loan.
Third, if the lender approves the new borrower's assumption application then the first borrower is no longer responsible for re-paying the debt. The loan must not be in default at the time of assumption.
Fourth, according to HUD, "the maximum allowable fee for a credit qualifying assumption is $500."
Fifth, by assuming a fixed-rate FHA loan the borrower is paying more principal with each payment.
For example, with a $100,000 FHA loan at 4 percent the monthly payment for principal and interest over 30 years is $477.42. After five years the payment is unchanged but the portion of the payment devoted to principal has increased from $144.09 to $175.34. In other words, the new borrower is paying less interest and the loan has 25 years remaining rather than 30 years.
For more specifics speak with a specialist at LendingTree for additional information regarding FHA loan assumptions.
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