Assumable FHA Loans & Lower Interest Rates

Not all home loans are assumable. Unfortunately, most conventional mortgages are not assumable. However, loans that are insured by the Federal Housing Administration (FHA) or backed by the Department of Veterans Affairs (VA) or United States Department of Agriculture (USDA) are assumable as long as specific requirements are satisfied.

You may need to be prepared to take out a second home loan to cover the difference between the purchase price and what the seller owes on the original mortgage.

Say that the purchase price of a home is $175,000, and the remaining loan balance is $100,000 at 2.8%. A buyer may be able to assume the exiting $100,000 loan at 2.8% and the lender could assist with the small secondary loan for the remaining $75,000. Or, If you have a large amount of money saved up, you can use that cash toward closing costs and remaining purchase price balance.

For most FHA and VA loans, a seller must obtain lender approval for an assumable mortgage.

Homeowners and house hunters alike sometimes wonder about the possibility of an FHA loan assumption from the current owner with a lower rate.

If you purchased a home with an FHA mortgage loan, does the FHA allow you to sign that loan over to another qualified borrower, so they can assume responsibility for the loan and take ownership?

This type of transaction is permitted for FHA single family home loans, but there are certain considerations you should know about starting with the date of the original loan and how that date can affect the assumption.

Depending on when the loan was issued, there may be different requirements for the borrower and the homeowner alike. For example, “If the loan application was signed by the borrower before December 1, 1986, the FHA-insured mortgage generally contains no restrictions on assumability.” That information is found in HUD 4155.2 Chapter Three, and it means that the FHA loan that meets that standard is “freely assumable”.

For FHA loans issued after December 1, 1986, the lender’s participation is required.

An FHA loan assumption requires a credit check to insure the borrower is qualified. Furthermore, the original borrower will have to work with the lender in order to complete the loan assumption.

We find instructions for the lender to that effect in Chapter Three of HUD 4155.2. It tells the lender:

“For a mortgage where the application was signed on or after December 1, 1986, the loan may be assumable depending on a creditworthiness review of the assumptor(s).”

In these cases, approval of the FHA loan assumption should not be taken for granted any more than the original mortgage loan was; the lender is, similar to the original mortgage, required to make sure the new owner of the home is an acceptable credit risk. The person assuming the FHA loan should prepare for the transaction the way any home buyer would for a typical loan application.

That means reviewing FICO scores, reducing debt-to-income ratios, and preparing for any expenses associated with the loan assumption. The house hunter should seriously think about a home inspection, in exactly the same way a borrower applying for a new-purchase FHA mortgage would. Just because the loan is being assumed, rather than being applied for in a new purchase transaction, doesn’t mean the deal doesn’t carry the same degree of risk as a new purchase. The home inspection is strongly encouraged for any FHA mortgage loan.

Review the HUD handbook for official terms and contact your trusted lender.