Is an FHA Loan Assumable?

A seller could be handing his FHA mortgage over to a buyer along with the keys.

When interest rates go up after a significant period of low rates, FHA loans become quite attractive. Unlike nearly all conventional loans, FHA loans are assumable. This means that a new buyer can take over a seller's lower rate mortgage instead of having to get a new loan at a higher rate. FHA guidelines have specific rules concerning assumptions.

Identification

In a loan assumption, a buyer assumes responsibility for the loan payments on a loan originated by someone else. The buyer usually pays the remainder of the purchase price to the seller with another loan or with owner financing after picking up the current loan as is, including the balance due and the remaining term length. Unless the lender releases liability, the original mortgage holder is still liable for repayment of the loan in case the new mortgage holder defaults. The mortgage will still show on his credit as a liability, affecting his ability to get a new mortgage.

Time Frame

FHA guidelines handle assumptions in two different ways. Loans originated prior to Dec. 15, 1989, are freely assumable. This means that the buyer does not have to qualify for the loan through the lender in order to assume the loan. All they have to do is sign the paperwork to assume the loan.

Considerations

On FHA loans originated prior to Dec. 15, 1989, the original mortgage holder retains liability for the loan unless they formally request a release of liability for the loan. The lender must release the original mortgage holder, but only if the new mortgage holder is creditworthy and signs a document agreeing to take full responsibility for the loan. If the new mortgage holder is not creditworthy according to an underwriter using FHA guidelines, the lender is not obligated to release the original mortgage holder from liability. Since the lender's primary concern is preventing loss through default, it is unlikely they will agree to the release because that increases the chances of the loan being repaid.

Post 1989

FHA loans originated on or after Dec. 15, 1989, are not freely assumable. The new mortgage holder must qualify for the loan as they would for a new loan and the lender must find them creditworthy using FHA guidelines. The lender will automatically get a release request from the original mortgage holder signed at closing, which they must honor. Any FHA loan assumption from within this timeframe that is not credit approved becomes due in full immediately unless the seller retains an ownership interest in the property.

Misconceptions

FHA loans are assumable by investors and those purchasing a home for use as a second residence. These buyers must still qualify under FHA loan guidelines but are limited in the percentage of value they can assume on any loan originated on or after Dec. 15, 1989. Investors must buy the loan down to 75 percent of the original loan amount or the current value. Second-home buyers must buy the loan down to 85 percent on any loan originated between Feb. 5, 1988, and Jan. 26, 1991. Regular purchase guidelines for second homes apply to any assumptions by these buyers on home with loans originated after Jan. 26, 1991.

References

• The Washington Post: Assumability: A Hidden Potential Value To FHA Loans
• Federal Housing Administration: HUD 4155.1, Mortgage Credit Analysis..., Section 7
• Financial Web: Understanding Assumptions