FHA Assumable Loan
An FHA Assumable Loan allows a buyer to take over, or assume, a seller’s home loan.
What is an assumable mortgage?
An FHA Assumable Loan is a type of assumable mortgage that permits a buyer to obtain the same interest rate, repayment period, current principal balance, and in general, all the terms of the seller’s current existing home loan. In lieu of a brand new mortgage, the new homebuyer picks up right where the seller left off and agrees to make all future payments on the loan.
To assume an FHA loan, the FHA requires approval by the U.S. Department of Housing and Urban Development or HUD, unless the home loan was established before December 1, 1986. As a result, the new homeowner, and now the assumptor or the person assuming the loan must apply for loan assumption and go through the underwriting process. With a home assumption, there are no down payments or closing costs.
The loan assumption eligibility follows the same FHA guidelines for new loans and refinances.
Advantages of Assuming the Seller’s Loan
Interest Rate Savings
The primary advantage of assuming a loan is if the seller’s mortgage interest rate is lower than the current market rates. For example, if the previous homeowner locked in a 4% fixed interest rate, and the current market rates are at 6%, the new homebuyer saves money.
Because the new home buyer does not need to apply for a new loan, he saves on fewer closing costs.
An assumable home loan makes your home more marketable and attractive to potential buyers.
Disadvantages of an Assumable Mortgage
Although the bank does not require down payment, the assumptor still has a substantial upfront cost. For example, let’s say that the purchase price of a home is $250,000 with a remaining mortgage of $150,000. The buyer is responsible for continuing the future monthly payments for the remaining $150,000. However, he must also pay the difference of $100,000 in cash or by taking out another loan.
If the buyer needs to take out another loan, the two mortgage lenders will need to cooperate. Having two loans may complicate the home buying process because of the possibility of defaulting on one or both mortgages.
Release from Liability
If a seller remains responsible for the mortgage even after the buyer assumes the loan, the seller remains at risk. If the buyer doesn’t make his payments, the seller’s credit could also be negatively impacted.
As a result, the seller needs to confirm that the lender releases the original borrower, the seller, from all liability for the mortgage. FHA loans are assumable if the buyer meets FHA standards, such as a credit score of at least 620, no Chapter 7 bankruptcy filings within the past two years, and foreclosures in the past three years.