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assumable loans

Are FHA Loans Assumable?

By Joe Silver

Many people are attracted to FHA loans to buy a home. The reasons for this are many that we will detail later in this article. But one of the big advantages of an FHA loan that many people do not know about is that they are assumable.

Assumption of an FHA loan is the process where the mortgage is effectively taken over by another party. This means that if you have someone who wants to buy your house, they can theoretically take over your FHA mortgage.

Note that the person would have to meet all borrowing criteria from the lender to qualify to assume the FHA loan. But if they do, this could be a real benefit that could help you sell your home faster.

When an FHA-Assumable Loan Helps

The most common situation where being able to assume an FHA loan is a benefit is in a rising interest rate market. Let's say that you bought your home three years ago and the interest rate is 3.75% for a 30 year fixed. But now you want to sell your home, and the current interest rates are 4.75%.

If you have a low interest rate FHA loan that is locked for at least a few years, or the entire term of the loan, you could have an advantage when it comes time to sell. Many people who want to buy could be attracted by the low, fixed rate loan on your property. If the potential buyer can be approved for an assumable FHA loan, this could get your home sold faster.

Simple FHA Assumption Process – Old Loans Only!

How simple the assumption process is will depend upon when the FHA loan was originated. If the loan was originated prior to Dec. 1, 1986, FHA does not mandate prior approval for the loan to be assumed.

However, if the loan was originated after that, the loan still is assumable, but FHA must do what they call a creditworthiness assumption process.

For all loans that are after the above 1986 date, FHA approval is needed and credit verification by the lender must occur. The new rules by FHA require the new borrower to be qualified just the same as with an entirely new FHA loan.

A credit check for a potential loan assumption will be done just the same as with a new loan. Loan assumptions do not offer any more lenient policies on credit. They also are not more stringent, either.

The FHA rules state that the lender who holds the note will determine if the new borrower is creditworthy for the loan, in accordance with the standard mortgage credit analysis standards.

Is It Worth It?

You should remember that FHA loan qualifications have fairly high mortgage insurance premiums that stay in effect for the life of the loan, unless you refinance. With FHA required mortgage insurance, the loan will cost you more over the years than a loan that does not have mortgage insurance.

Whether it is worth assuming an FHA loan or not really boils down to what the interest rates are. If the assumable loan has a rate that is 1% less than the rate you can get with a new loan, you generally are going to benefit from assuming the loan. If it is less than that, you have to run the numbers to see if it will be financially worth doing.

Other Benefits

There are other substantial benefits of getting an FHA loan. Let's take a close look at them:

  • Low interest rates: Assumable FHA loans have very low rates that usually are lower than market. This is the case because the loan is backed by the FHA.
  • Low down payments: You can get an FHA loan with only 3.5% down if your credit is 580 or higher. If it is lower, you need to put 10% down. The FHA loan is really about the lowest down payment loan that the average person can get today, outside of VA and USDA loans.
  • Flexible credit terms: You can qualify for assumable home loans insured by the FHA even if you have a fairly low credit score.
  • Bankruptcies and foreclosures are ok (two years): You have to wait two years from these events, but you can still get an FHA loan.
  • Closing cost help: The seller can pay part of your closing costs if you can negotiate it.
  • Can get gift funds for down payment: You can get the down payment from a friend or relative if they give the FHA lender a letter stating that it is a loan. Learn more about FHA rules for gift funds.

The Bottom Line

FHA assumable loans are an excellent value for people who have average credit or worse. They also are very beneficial because they are assumable, which is a huge plus in a rising interest rate market for some buyers.

 

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