One less known advantage of selling a home with an FHA mortgageis that these loans are assumable. Meaning, the buyer who still needs financing to pay for the home, can simply just take over the loan. This way, they can save on interest (given the original mortgage carries a low interest rate), and on the cost of closing.
However, the assumption is not automatic. To be able to take over the loan, the buyer must first qualify and be approved before the loan can be transferred.
So how does one qualify for an FHA assumable mortgage?
Types of FHA Assumption
Two assumption programs exist for FHA mortgages:
- The Simple Assumption – for mortgage insured by the FHA before December 1, 1986
- Creditworthiness Assumption– for mortgage insured by the FHA after December 1, 1986
What is a Simple Assumption?
A simple assumption is the simpler method between the two. There is almost no legalities involved when assuming an FHA loan insured prior to December 1, 1986. Basically, you only need to inform the FHA of the buyer’s intent to assume the mortgage. No credit checks necessary.
How about a Creditworthiness Assumption?
Contrary to the leniency on FHA loans insured prior to December 1, 1986, assuming an FHA mortgage insured after the said date can be a bit more stringent. To qualify, a buyer must meet the standards set by the HUD or the Department of Housing and Urban Development. The buyer is still required to pass the qualifying requirements for a mortgage. In addition, the lender must give consent to the process by stamping his or her approval on the assumption.
The credit review shall be completed within 45 days after the lender receives all the necessary documents. The review may consist of the following requirements:
- credit review– a review of the borrower’s credit and if the current mortgage is serviced by a Direct Endorsement (DE) approved lender
- secondary financing– a secondary form of financing may be allowed, provided that the repayment terms of the loan is clearly defined and included in the underwriting analysis
- seller contributions– cash contributions from the seller for the assumption is not allowed, although they can contribute to some of the costs of closing without reducing said amount in the mortgage
*Documentations may be further required and assumptions in the name of a corporation, partnership, sole proprietorship or trust is not allowed.
There are a few instances that may hamper your assumption approval. These include:
a) carrying a student loan debt
b) having a Chapter 7 bankruptcy within the past two years
c) having a foreclosure which is less than three years old
Requirements may vary from lender to lender but the above listed are the general ones, as stated in the HUD’s portal. If you have questions about the assumption, work with your agent to prepare right. When you are adequately set, a mortgage assumption could help you save thousands of dollars than when acquiring a new financing.