Guidelines for Assuming an FHA Mortgage

Guidelines for Assuming an FHA Mortgage
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A unique feature of mortgages insured by the Federal Housing Administration (FHA) is that they are assumable. This means that you can take over a mortgage that is in someone else's name, letting the borrower off the hook. Of course, certain restrictions apply, such as checking the creditworthiness of the person assuming the loan.

Simple Assumption

The specific guidelines for assuming an FHA-insured mortgage vary depending on when the loan was originated. For mortgages originated before Dec. 1, 1986, you can assume the loan following the simple assumption process. A simple assumption allows you to take over the title and mortgage payments without assuming liability. That means if you fail to make payments, the original mortgage holder will face the repercussions.

Creditworthiness Review

Assumptions of loans originated on or after Dec. 1, 1986 require that the assumptor undergo a creditworthiness review by the lender. Lenders follow standard mortgage credit analysis procedures when evaluating an assumptor. A lender must render a decision within 45 days of receiving all of the required paperwork.

Investor Limitations

Investors are barred from assuming loans made on or after Dec. 15, 1989 as a result of the HUD Reform Act of 1989 This restriction is enforced even when the assumptor also assumes liability from the original mortgage holder. Investors can assume mortgages not subject to the restrictions of the Act. They must pay down the mortgage to reach a 75 percent loan-to-value ratio, if the previous mortgage holder requests a release from liability.

Because of the restriction on investors, a person assuming a mortgage subject to the HUD Reform Act must intend to be the owner-occupant of the property he acquires.

Release Of Liability

Assumptions of loans subject to the HUD Reform Act require that the assumptor assume liability of the mortgage. To start this process, the lender must complete a Request for Credit Approval of Substitute Mortgagor form from HUD. To complete the transfer of liability, an Approval of Purchaser and Release of Seller form must be completed.

A special case exists for mortgages originated between Dec. 1, 1986 and Dec. 14, 1989. If the assuming borrower makes all mortgage payments on time for a five consecutive years, liability is automatically transferred to her from the previous borrower.