An assumable mortgage can be a good deal for a home buyer and an important marketing tool for the seller. While lenders have eliminated assumability in most cases for conventional loans, mortgages insured by the Federal Housing Administration remain assumable with conditions. There is no formal assumption clause in an FHA loan contract. An assumption is controlled by other clauses in the document.
Assumable Is The Default State
Any mortgage will be assumable unless the contract specifically states that the loan cannot be assumed. The tool to prevent an assumption is a "Due on Sale" clause. This clause prevents the buyer of a home from also taking over and assuming the existing mortgage. A mortgage that does not have a "Due on Sale" clause is assumable, but there may be other clauses in the contract that put limits on an assumption.
HUD Reform Act
The HUD reform Act of 1989 changed the assumption rules for FHA-insured loans. Prior to the act, any FHA loan was assumable without conditions. Loans insured by the FHA that have originated since the law's effective date are assumable only if the buyer of the home meets the agency's financial qualification guidelines. Any current FHA loan that a homebuyer would want to assume would require an application to qualify for financing and approval.
Modified "Due on Sale" Clause
The FHA's model mortgage form covers the assumption rules in the "Grounds for Acceleration of Debt" section of the contract, which is legal jargon saying that the loan must be repaid in full. The clause that requires immediate payment of the mortgage is titled, "Sale Without Credit Approval." As a result, an FHA mortgage has a "Due on Sale" clause that does not apply if the buyer gets credit approval to assume the loan.
FHA-Approved Lender to Handle Assumption Approval
The assumption of an FHA loan must be handled by an approved lender who can take the buyer's application and approve the new borrower under the FHA's lending standards. If the buyer is approved, the lender will complete the relatively simple paperwork required to finalize the assumption. Any questions on whether a buyer can qualify should be taken to a lender that handles new FHA loans as well as assumptions.
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