Are FHA Loans Assumable? Here’s What You Need to Know
Home loans backed by the Federal Housing Administration (FHA), are known for having a lower barrier of entry for aspiring homebuyers. Many borrowers may not be aware that FHA loans are assumable, meaning you can take the loan (and its terms) over from another borrower.
Here’s what you need to know about FHA assumable mortgages and how to qualify for one.
- What is an assumable mortgage?
- Are FHA loans assumable?
- How to assume an FHA home loan
- Costs to assume an FHA home loan
- Pros and cons of an FHA assumable mortgage
- FHA loan assumption FAQs
What is an assumable mortgage?
An assumable mortgage is a home loan that can be taken over by someone other than the current borrower. When you’re taking over a mortgage, you become responsible for the original loan terms, including the:
- Outstanding loan balance
- Mortgage rate
- Remaining loan term
Are FHA loans assumable?
All FHA loans are assumable, according to the U.S. Department of Housing and Urban Development (HUD), which oversees the FHA. However, there are three different sets of loan assumption rules for FHA home loans, depending on when the loan was taken out.
- If the loan originated before Dec. 1, 1986: There are no restrictions on assuming a loan, meaning there’s no need for the lender to review the creditworthiness of a buyer taking over a mortgage.
- If the loan originated between 1986 and 1989: Some loans that were first borrowed between 1986 and 1989 may have language that restricts assumability. These loans are assumable despite that language, due to congressional action taken at a later date.
- If the loan originated after Dec. 15, 1989: The lender must approve the buyer’s creditworthiness, ensuring that they meet minimum FHA loan requirements.
How to assume an FHA home loan
Follow the steps below if you’re interested in assuming an FHA-insured loan.
- Verify that the loan is assumable. Confirm that the seller has an FHA loan. They might have to review closing paperwork or check in with their original lender.
- Review your creditworthiness. You’ll need at least a 500 credit score and maximum 43% debt-to-income (DTI) ratio to qualify for an FHA loan, but it’s best to exceed the credit score minimum and keep your DTI ratio below the maximum to boost your approval chances.
- Apply for FHA loan assumption. There’s a chance the loan you want to assume originated after Dec. 15, 1989, which means the seller’s lender will need to verify your ability to qualify for and repay the mortgage. Aside from assessing your creditworthiness, the lender may scrutinize your employment and income documentation.
- Have the seller released from the loan. The seller is still responsible for the mortgage, including if you miss a mortgage payment, unless they’re released from liability. The lender must sign Form HUD 92210.1, which is a home purchase approval and liability release document. Without this form, the seller will remain liable for missed payments.
There are a handful of exceptions when a creditworthiness review isn’t required to assume an FHA home loan:
- If the original homeowner retains ownership of the home.
- If the homeowner dies and gifts the home to an heir.
- If there’s a divorce and one spouse (who is also on the title) continues to live in the home.
Costs to assume an FHA home loan
Outside of the monthly mortgage payment, consider these other costs when getting an FHA assumable mortgage.
- Down payment. If you were applying for a new FHA loan, you’d have a minimum down payment of 3.5% of the home’s purchase price. With an assumable loan, you’d pay the difference between the home’s value and the outstanding loan balance, not the standard down payment amount. For example, if you were thinking about assuming a mortgage with a $200,000 balance and the home is worth $220,000, you’d owe a $20,000 down payment.
- Closing costs. There aren’t many closing costs since a new loan isn’t being originated, but there are credit report and loan processing fees. There’s also an assumption fee, which can be as much as $900.
- Mortgage insurance premiums. With an FHA loan, you’re responsible for an annual mortgage insurance premium (MIP), which is divided by 12 and added to your monthly mortgage payments for the life of the loan. There are only two ways to get rid of MIP; one way is if the seller had put down 10% at their mortgage closing. Under this option, MIP can be cancelled after 11 years. The second way is to refinance into a conventional loan after you’ve gained at least 20% equity in the home.
Pros and cons of an FHA assumable mortgage
Assumable FHA home loans offer several benefits to both buyers and sellers. But that doesn’t mean that assuming a loan is always the right choice. Consider the following pros and cons.
- Lower credit score requirements. You can qualify for an FHA-insured loan with a credit score as low as a 500, which means your credit doesn’t have to be in tip-top shape. Still, it’s wise to improve your credit profile as much as possible before moving forward with a loan assumption.
- Potentially lower mortgage rate. You accept the original terms of an assumable mortgage, including the interest rate. This can be especially beneficial if your credit score is on the lower end, because you may assume a loan that has a significantly lower rate than you’d qualify for on a new mortgage.
- Fewer closing costs. Closing costs on a new mortgage can range from 2% to 6% of the loan amount. The closing costs on an assumable loan are much lower. Plus, you won’t have to pay the upfront mortgage insurance premium that’s required for new FHA loans.
- Pricey assumption fee. Taking over a mortgage isn’t free. The lender can charge you up to $900 for the assumption, in addition to the other buyer closing costs.
- Potentially higher down payment. You must compensate the seller for the equity they’ve built, no matter the amount. If they have a sizable amount of equity, this may cause affordability issues for you. Paying the seller tens of thousands of dollars might cost more than the required down payment on a new mortgage.
- Loss of shopping opportunity. When assuming a loan, you must work with the lender who approved the original mortgage. In other words, you assume the loan, its terms and the lender that funded it. You lose the opportunity to shop around with multiple lenders and compare costs.
FHA loan assumption FAQs
Which types of mortgages are assumable?
Government-backed loans are usually assumable. This includes FHA-insured loans, and those guaranteed by the U.S. Department of Veterans Affairs (VA) and U.S. Department of Agriculture (USDA). Some conventional loans — standard adjustable-rate mortgages — may also be assumed.
What is the due-on-sale clause?
The due-on-sale clause permits a mortgage lender to demand that a loan be paid in full immediately if ownership of the loan is sold or transferred without the lender’s consent. FHA loans are due on sale if there was no credit approval before the assumption took place, unless an exception is met.
What’s the difference between simple assumption and novation?
A simple assumption usually happens between a home seller and buyer in private. The buyer takes the title to the home, but the seller is still liable for the loan. Novation involves transferring the rights and responsibilities of the loan, including the title, from the seller to the buyer, and a lender must approve the transaction.
How can I make sure I’m not overpaying for an assumable mortgage?
You could pay for an independent home appraisal to verify the home’s current value. This may help you determine the down payment amount to negotiate with the seller.
Is the seller impacted if the buyer defaults on the mortgage payments?
The seller is still responsible for the assumable mortgage if their lender doesn’t release them from liability. This means that a late mortgage payment would negatively impact the credit histories of both the buyer and the seller.