Are FHA Mortgages Assumable?
An assumable mortgage allows the current homeowner to transfer the loan to a buyer of the home, with the new owner taking over the payments at the existing interest rate and loan balance. Most conventional mortgages have a due-on-sale clause that prevents the assumption of a loan. FHA mortgages do not have this clause and are assumable.
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Identification
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FHA mortgages are home loans that are government-insured through the Federal Housing Administration division of the U.S. Department of Housing and Urban Development -- HUD. The government's insuring of these loans allows home buyers to finance a home purchase with a low down payment and easier credit qualification. HUD rules require the loan originator to make all FHA-insured mortgages assumable.
Considerations
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HUD puts some restrictions on who can assume an FHA mortgage. FHA-insured loans originated after December 14, 1989, cannot be assumed by investors. Only someone who plans to be an owner-occupant of the home can assume an FHA loan. A prospective buyer must also meet the financial and credit qualifications for a new FHA loan to be eligible to assume an existing FHA loan.
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Assumption Process
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A home buyer who wants to assume an FHA mortgage must complete a credit application and go through the loan underwriting process. The lender processing the assumption is allowed to charge for a credit report plus a $500 loan processing fee. If the buyer is approved by the FHA, the lender will complete the paperwork to transfer the mortgage to the new homeowner and the original owner will no longer be responsible for the loan.
Potential
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The assumable feature of an FHA mortgage can have value if the interest rate on the existing loan is lower than the market interest rate for new mortgages. A homeowner with a low-rate assumable mortgage has an additional feature to promote the sale of her home. A home buyer may be willing to pay a higher price than for comparable homes to assume a low-interest-rate mortgage. An assumable FHA loan will have the most value if interest rates rise steadily in the early years of the mortgage, before the principal has been significantly reduced.
Expert Insight
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An article in the Washington Post written by Jack Guttentag, professor of finance emeritus at the Wharton School, published in February 2010, discussed the added value of the FHA assumption feature in the current low-interest-rate environment. Mortgage rates were setting record lows in 2010 and the article stated that homeowners who finance or refinanced with FHA-insured loans at the record low rates would have a valuable asset if mortgage rates increased.
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