The Federal Housing Administration (FHA) insures home lenders against potential losses on millions of mortgage loans. FHA loan products often have less stringent borrower requirements, which may make them ideal for first-time homeowners. When these homeowners wish to sell, they can assign the mortgage to the new, qualified owner. Although the process is streamlined and has definite advantages, FHA mortgages are not fully assumable so not every buyer will qualify.
Freely vs. Conditionally
To successfully assume an FHA mortgage investment, you must qualify for the loan by FHA standards. This means that you must have the lender's permission before you can take over the loan. The lender will review your finances before making a determination based on FHA guidelines. You must permit the lender to check your credit as well as provide income and asset verification. The Department of Housing and Urban Development says that qualifying to assume another person's loan is almost the same as applying for a new loan yourself.
Some exceptions apply to the more than 12 pages of rules describing FHA loan assumability. If the loan originated prior to Dec. 1, 1986 then no restrictions exist. If the loan originated after Dec. 15, 1989, then restrictions apply based on whether the person assuming the loan will live in the home. In fact, lenders can't assume loans unless the assumptor plans to live in the home as a primary or secondary residence, or the loan is itself a secondary. If you attempt to assume the loan without lender permission, then the lender must accelerate the balance due as payable in full immediately. This is called the due-on-sale clause. There are other restrictions as well.
If you're interested in assuming another person's loan, chances are you're looking to pay the seller's low interest rate. In addition, you're probably looking to avoid a new loan's settlement expenses, many of which aren't immediately tax deductible. You may also want to avoid the appraisal process. Although you'll still have to pass the lender's loan underwriting standards, because it's an FHA loan, these standards may be friendlier than non-FHA loans.
Weighing the Options
One of the minuses of the FHA loan is the cost of mortgage insurance. Borrowers have to pay an upfront premium as well as monthly premiums. If you're assuming an FHA loan, then the amount that you would otherwise have to pay toward this insurance is reduced. The potential value of an assumable mortgage depends upon the amount of time the owner plans on having the loan in addition to future interest rates. But provided that you qualify, assuming an FHA loan may be the right choice for you.
- U.S. Department of Housing and Urban Development: The Federal Housing Administration (FHA)
- "The Washington Post"; Assumability: A Hidden Potential Value to FHA Loans; Jack Guttentag; Feb. 20, 2010
- U.S. Department of Housing and Urban Development: Chapter 6: Change of Mortgagors (Assumptions) or Services and Sale of Mortgages
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Lisa Bigelow is an independent writer with prior professional experience in the finance and fitness industries. She also writes a well-regarded political commentary column published in Fairfield, New Haven and Westchester counties in the New York City metro area.