Rules for FHA Assumptions

One unconventional method for obtaining a mortgage is through assumption. The Federal Housing Administration (FHA) allows sellers and buyers to seek assumption in order to benefit both parties. Assumption occurs when the buyer takes over or assumes the mortgage on the home, a mortgage originally obtained by the seller years before. However, the process isn't that simple.

Benefits

Mortgage assumptions are usually sought when the current interest rate offered by the bank is much higher than the rate that the seller originally obtained. Thus, the buyer escapes a higher mortgage payment.

Features

The lender must approve the buyer before the assumption occurs. The buyer's credit, income and financial history are examined first. The buyer must also cover the difference between the house price and the balance of the mortgage. This is done using either a second mortgage at the current interest rate or cash.

Function

FHA loans originating before Dec. 1, 1989, have special considerations. To assume these mortgages, the buyer is not required to prove creditworthiness. However, in lieu of this credit check, the seller becomes liable for the loan if the buyer defaults before the balance is paid. The process is called Simple Assumption.

Considerations

To get away from the risks of Simple Assumption, the seller can ask for a release of liability document. Mortgages originating after Dec. 1, 1989, automatically come with such a clause. These mortgages require lender approval before the mortgage can be assumed.

Warning

The point of mortgage assumption is to get a discount on the interest rate. When the mortgage being assumed is significantly less than the price of the home, then the buyer must get a second mortgage or come up with cash. A second mortgage obtained at the current rate often negates the benefits of the assumption, making a conventional mortgage easier.

References

• Explanation of Mortgage Assumption
• FAQ on Mortgage Assumption from the FHA