One financing option most new homebuyers are not aware of is a mortgage, or in this case, an FHA loan assumption.
That’s right! Unlike the standard FHA loan application, assuming a loan can save you time and money, as you don’t have to go through the entire loan application process. Still, there are specific requirements that you’ll need to meet.
So, in this article, we’ll explore whether or not you should assume an existing FHA loan, the eligibility criteria, and what the process entails.
Buckle up, and let’s deep-dive.
What Is an FHA Assumable Loan?
An FHA assumable loan allows you to assume the existing mortgage of the current homeowner. This means that you take over the existing mortgage loan, including its interest rate, terms as well as any other associated costs and fees.
This is also beneficial to you and the seller. Why? Because it can save you cash on closing costs and offer a lower interest rate than you could secure on your own. On the other hand, a seller can transfer their property loan to you without paying off the loan in full.
Here are some key features of FHA assumable loans:
- Low closing costs: Assuming an existing FHA loan can save you cash on closing costs since you won’t pay for a new appraisal or other fees associated with a new loan.
- Low-interest rates: One of the main features of an FHA assumable loan is that it may offer a lower interest rate than a new mortgage loan. This can save you thousands of dollars over the lifespan of the loan.
- Streamlined process: Assuming an existing FHA loan can be streamlined because you get faster closing times and fewer documentation requirements.
Can FHA Loans Be Assumed?
Yes, as we have already established, FHA loans can be assumed by other parties. However, the option to assume an FHA loan is available only if you got your FHA loan before 1st December 1986 and you meet the set requirements.
These requirements include the fact that the loan must be current, you must qualify for the loan, through the standard FHA loan requirements, assume the debt, and pay a fee to the federal housing administration.
For loans issued after 1st December 1986, assumability is determined case-by-case. So FHA loans issued after this date are not assumable unless specific criteria are met, such as a borrower’s death or a divorce that transfers home ownership to one of the spouses.
How to Assume an FHA Loan
Assuming an FHA loan follows a similar process as applying for a standard or FHA 203k loan application.Here’s how to go about it.
- Confirm the loan is assumable: If the loan was taken after 1 December 1986, the loan is assumable only if the lender approves. If the loan was taken before 1 December 1986, the loan is assumable without the lender’s approval.
- Qualify for the assumption: Like with any other loan, you must qualify to assume an FHA loan. You’ll need to meet the lender’s income and credit requirements and any other eligibility criteria.
- Complete the assumption paperwork: If you qualify, you must complete the necessary paperwork. This includes an application for assumption, a mortgage assumption agreement, and a release of liability.
- Pay the assumption fee: The lender will charge an assumption fee, which can vary from lender to lender. This fee covers the costs associated with processing the assumption paperwork.
- Close the assumption: Once you’ve completed the paperwork and paid the fee, close the assumption. This is similar to a regular mortgage closing, where you sign the necessary documents and make any required down payment.
Requirements for Assuming an FHA Loan
Just like the FHA standard requirements that determine your eligibility and how much you qualify for, assumable FHA loans also come with unique criteria.
Here are the requirements for assuming an FHA loan:
- Assumption fee: You will be required to pay an assumption fee, which is typically 0.5% of the outstanding loan balance. This fee covers the administrative costs associated with processing the assumption.
- Creditworthiness: You must meet the creditworthiness standards set by the FHA. This means you must have a good credit rating, and a solid credit history and demonstrate that you can afford to settle monthly mortgage payments.
- Equity: You must have enough equity in the home to assume the loan. This means that the balance on the existing loan cannot exceed the property’s current value.
Note that these criteria are usually in addition to qualifying through the standard FHA requirements and are also subject to lender requirements.
If you’re looking to assume an FHA loan in any of our service areas, we can be the guide to ensure a smooth foolproof process.
What Are the Pros and Cons of Assuming an FHA Loan?
Caught between assuming and applying for a standard FHA loan? Here is a table summarizing the pros and cons to help you decide.
Pros of Assuming an FHA Loan:
- You benefit from the original borrower’s lower interest rate, saving you money over the loan term.
- You may enjoy lower closing costs compared to obtaining a new mortgage, saving you money upfront.
- You go through a simpler and faster process compared to applying for a new loan, as the original borrower’s credit and income are not considered.
- You do not need to provide a down payment, making it more accessible for buyers with limited savings.
- The loan may be assumable by the next buyer if you decide to sell the property in the future.
- Making timely payments can help you build positive credit history, improving your credit score.
Cons of Assuming an FHA Loan:
- You must meet FHA’s requirements for assuming the loan, which may impact your eligibility.
- You can only assume the existing loan amount, which may not be sufficient for higher-priced properties.
- You must accept the terms and conditions of the existing loan, which may not align with your preferences.
- The seller may have restrictions on selling or transferring the loan, limiting your options.
- The existing loan may have costs such as mortgage insurance premiums (MIP) to pay.
- It may limit your ability to refinance in the future for loan term changes or lower interest rates.
Frequently Asked Questions
Can an FHA loan be assumed multiple times?
Yes, an FHA loan can be assumed multiple times, as long as you meet the FHA’s eligibility qualifications and you’re approved for assuming the loan. However, the process can become more complicated with each assumption, as the lender may require additional documentation and charge fees for the assumption. Additionally, the original borrower may still be liable for the loan if you default on the monthly contributions.
Can I assume an FHA loan with bad credit?
Assuming an FHA loan with bad credit is possible but can be challenging. While credit score is not the only factor considered in assuming an FHA loan, it is crucial.
When assuming an FHA loan, you must meet the same credit and income qualifications as the original borrower. This means you must also have a DTI ratio that adheres to FHA standards, typically requiring a ratio of 43% of your gross income at most.
If you have bad credit, it may be challenging to meet these requirements. But, you can still assume the loan with the help of a co-signer or by proving a solid financial history in other areas, such as consistent employment and a history of on-time rent payments.
Can I change the terms of an assumed FHA loan?
Once you assume an FHA loan, you take over the existing terms of the loan. What does this mean? It means you cannot change any terms, including the interest rate, loan length, or monthly payments. You must continue making payments according to the loan’s original terms until it is paid off in full.
However, if you need to change the loan terms, you can refinance the loan. This means you need to get a new loan with different terms, including a new interest rate, loan length, and monthly payments. Refinancing can be a great option if you want to modify the terms of your FHA loan or get a lower interest rate.
Can the seller assist with closing costs on an assumed FHA loan?
Yes, the seller can assist with closing costs on an assumed FHA loan. When you assume an FHA loan, you take over the existing loan and assume responsibility for settling the remaining payments. To help offset these costs, the seller can agree to pay some or all of your closing costs. This is commonly referred to as a seller contribution.
Keep in mind that FHA guidelines limit the amount that a seller can contribute. According to FHA rules, the seller can contribute up to 6% of the home’s sale price towards your closing costs. Luckily, assuming an FHA loan comes with no down payment requirements.
To Assume or Not
All things being equal, assuming an existing FHA loan can be a good option to save money on closing costs and take advantage of favorable interest rates.
However, that decision should be based on your current financial situation.
Can’t decide between these two loan options?
Don’t get all tangled up. Just give us a ring and we’ll play loan detective, helping you unravel the mystery and figure out which option is the perfect fit for you.
