Is an FHA an Assumable Mortgage?
A new buyer cannot assume a conventional loan in most circumstances, but they can assume a Federal Housing Administration (FHA) mortgage. The FHA offers lenders insurance on mortgages that fit within certain eligibility guidelines mandated by the United States Department of Housing and Urban Development (HUD). An assumable mortgage refers to a home seller transferring the remaining amount of his mortgage note to the new buyer of the home.
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Benefits
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In an era of high interest rates, an assumable FHA mortgage allows a new buyer to take advantage of locked-in low interest rates. For example, an assumable mortgage with a locked-in mortgage rate of 5 percent will result in monthly payments of $536.82. If current home loan interest rates cost 10 percent, an individual would pay $877.57 a month for a new mortgage. A homeowner can save hundreds of dollars per month by assuming an FHA mortgage depending upon market conditions.
Considerations
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A seller and a buyer cannot simply agree to transfer an FHA-backed loan. Lenders must approve an FHA loan assumption in order for a home buyer to assume an existing mortgage. In addition, the lender may charge a fee in order to process the assumption, but these fees typically cost less than the funds needed to underwrite a new home loan.
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Eligibility
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In order for a buyer to receive an FHA assumption, the seller must use the home as a primary or secondary residence. Investment properties do not allow for assumption unless the existing debt comes to 75 percent of the loan-to-value (LTV) ratio on a single-family property or an 85 percent LTV ratio on a multifamily property. For example, a buyer who assumes a $75,000 mortgage on a property appraised at $100,000 has an LTV ratio of 75 percent.
Process
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The assumption process usually takes less time than if the buyer applies for a new mortgage. A lender will not ask for a property appraisal or conduct an in-depth investigation of the buyer's finances. The lender will pull a credit report and require the buyer to demonstrate that he can afford to make the existing monthly payments. HUD guidelines do not require a credit or income check in order for a buyer to assume FHA-backed mortgages originated before Dec. 1, 1986. Provided the buyer meets basic lending qualifications, the lender will transfer ownership of the loan from the home seller to the buyer.
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