Can You Assume an FHA Loan? What Borrowers Need to Know

Assuming an existing FHA loan can allow qualified buyers to purchase a home without having to get a new mortgage. But what exactly does it mean to assume a loan, and what are the requirements to assume an FHA-insured mortgage?

As a type of government-backed financing FHA loans have more flexible rules around assumability compared to conventional mortgages. However, FHA does place certain limitations on assumability that buyers should understand before pursuing this route.

In this comprehensive guide, we’ll cover everything you need to know as a buyer about assuming an FHA loan, including:

What Is an FHA Loan Assumption?

An FHA loan assumption allows a new buyer to take over the seller’s existing FHA mortgage The buyer assumes responsibility and makes payments on the initial borrower’s loan rather than having to apply and qualify for a brand new mortgage,

Key things to know about FHA assumptions:

• The new owner takes title to the property and makes payments on the existing FHA loan. The original borrower is released from liability.

• Assumptions require lender approval and a creditworthiness review of the assumptor. Qualification standards are similar to applying for a new FHA loan.

• FHA mortgages originated prior to 1986 have no restrictions on assumability Those after 1986 have some limitations

• FHA loans can only be assumed if they meet certain owner occupancy requirements by the assumptor.

Assuming an FHA loan allows qualified buyers to keep the home’s existing low interest rate and avoids an appraisal. Closing costs are also lower compared to a purchase with a new loan.

Are All FHA Loans Assumable?

The FHA allows assumptions on all of its single-family mortgage programs. However, depending on when the loan originated, there may be some restrictions in order to assume the mortgage:

FHA loans issued prior to December 1, 1986 – These mortgages contain no restrictions on assumptions and are freely assumable to qualified buyers.

FHA loans issued between 1986 and 1989 – The lender must conduct a creditworthiness review of the assumptor. Certain language restricting assumptions in these mortgages is not enforced.

FHA loans issued after December 15, 1989 – A credit check of the assumptor is required for the life of the mortgage. These loans also have firm limitations when being assumed by investors.

The key is that buyers must always meet FHA’s credit standards and occupancy requirements whenever assuming an FHA-insured mortgage, especially for those originated after 1986.

FHA Occupancy Requirements for Assumptions

For a buyer to assume an FHA loan, the property must become their primary residence. FHA has strict occupancy rules for assumptions:

• The assumptor must live in the home for at least 12 months after closing. It cannot be a secondary residence or rental property.

• 2-4 unit properties can be assumed with the buyer living in one unit and renting the others.

• Exceptions allow for renting out the property after 12 months of occupancy due to relocation or growing family size.

FHA does not insure mortgages that will not be owner-occupied by the assumptor. Meeting FHA’s occupancy rules is key for a successful assumption.

How to Qualify to Assume an FHA Loan

To assume an FHA loan, buyers must meet similar qualification guidelines as those getting a new FHA mortgage:

Credit Score – At least 580 FICO for 3.5% down and 500 for 10% down. Non-traditional credit may also qualify.

Debt-to-Income – Total DTI below 43% for the new loan payment and other debts.

Downpayment – 3.5% from the buyer’s own funds. Gifts cannot be used.

Employment – Stable income documentation from 2 years of employment or alternative sources.

Mortgage History – Any previous mortgages must have 0x30 late payments in the last 12 months.

While standards are flexible for FHA financing, lenders will ensure you meet the minimum requirements to assume an FHA loan responsibly.

How to Assume an FHA-Insured Mortgage

Follow these key steps for a smooth assumption of an FHA loan:

1. Find an assumable FHA mortgage – This usually happens as part of a home purchase when the seller has an existing FHA loan.

2. Review loan documents – Make sure the mortgage is not subject to any restrictions against assumptions.

3. Submit an assumption request to the lender – They will advise if the loan can be assumed and if a credit check is required.

4. Provide required paperwork – This includes income/employment documents and permission from the original borrower.

5. Get approved – The lender will verify you meet all FHA assumption requirements.

6. Complete the assumption at closing – Final loan assumption documents are signed at closing along with the home purchase transaction.

With proper planning and coordination with the lender, a buyer can seamlessly assume an FHA loan when purchasing a home.

Alternatives to FHA Loan Assumptions

Assuming an FHA loan has benefits but also limitations for buyers. Here are some alternatives to consider:

• FHA streamline refinance – The buyer qualifies for their own FHA loan while keeping beneficial terms from the seller’s existing loan.

• Conventional mortgage – Buyer can qualify for a conventional loan not subject to FHA occupancy rules and get today’s low rates.

• Portfolio loan assumption – Some banks allow assumptions on their portfolio loans with fewer restrictions.

• Seller financing – The seller holds a private mortgage for the buyer with more flexible assumption guidelines.

Depending on individual circumstances and property considerations, other options besides an FHA assumption may make more sense for both buyers and sellers.

The Bottom Line

Assuming an existing FHA loan can allow qualified buyers to purchase a home without obtaining new financing. This can potentially save time and money compared to a conventional purchase.

However, buyers need to understand FHA’s requirements around owner-occupancy and credit standards when assuming one of its mortgages. Working closely with the lender to properly qualify is key to a successful FHA loan assumption.