The Federal Housing Administration allows a homeowner to pass his FHA loan on to a qualified borrower when selling his house. Unique to certain government-backed loans, the assumption process can be a valuable tool for homeowners trying to sell in a market with high interest rates. It cuts closing costs and lets the borrower assume the original FHA loan balance, term, payment and interest rate. FHA loans accommodate borrowers with credit challenges and moderate incomes who have trouble qualifying for conventional loans. The agency insures mortgages by approved lenders. To assume an FHA loan, you must meet the FHA lender's qualification guidelines.
Find a seller who has an FHA-insured loan. All FHA loans are assumable; however, the loan's date of origination affects the buyer's qualification process. (See Tips) Ask a real estate agent to check the remarks under the "financing" portion of the homes' multiple listing service profile. This section informs potential buyers of the financing options available for the property. An FHA seller can -- but doesn't always -- list "assumable," "conventional," "FHA" and "VA" and like terms in this category, which tells you the seller is open to an assumption. You or the agent can also ask a seller if he has an FHA loan and if he's open to letting you assume the loan.
Gather a minimum down payment of 3.5 percent. The FHA lender requires you to contribute 3.5 percent of the sale price from your own funds or funds gifted by a family member to the transaction. When using your own funds, you must prove that you have the money in the bank or in other personal accounts. When using gift funds, you must have the relative sign a letter stating the gift amount and that the funds are a bonafide gift, not borrowed.
Calculate your debt-to-income ratio in advance, which FHA lenders do in the creditworthiness review to determine if you can reasonably afford to assume the seller's loan. The lender adds up your monthly debt obligations, including credit card minimum payments, auto and student loan installments and child or family support obligations. It adds this amount to the housing payment you want to assume, which includes principal, interest, taxes and insurance, then compares the figure to your gross monthly income. The FHA prefers that your monthly payments remain within 43 percent of your income, or a maximum of 43 percent DTI.
Check your credit score in advance to ensure you meet FHA lenders' credit requirements. The FHA allows credit score down to 500 with a minimum 10 percent down payment; however, lenders usually impose stricter score requirements. Most lenders require a 640 score to qualify for an FHA loan with a 3.5 percent down payment and won't consider a borrower who has a lower score for a loan, regardless of his down payment amount.
The assumption process differs between FHA loans originated before Dec. 1, 1986 and those originated on or after this date. The FHA places more restrictions on loans made thereafter, requiring new borrowers to complete a thorough creditworthiness process. Buyers assuming the older loans can forgo the credit and income analysis and take over the loan more simply. Assumptions for loans made before Dec. 1, 1986 are rare, since those loans often carry higher interest rates and have very low loan balances.
Get an idea of an affordable monthly housing payment by multiplying your gross income by .31, or 31 percent. The FHA prefers that your housing debt-to-income remain within 31 percent.
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