How to Assume an FHA Loan: A Step-by-Step Guide

Assuming an FHA loan can allow homebuyers to take advantage of low interest rates from older mortgages. With mortgage rates on the rise, being able to assume a loan with a lower rate can lead to substantial interest savings.

In this comprehensive guide we’ll explain everything you need to know about assuming an FHA mortgage including

• What is an FHA loan assumption?
• Pros and cons of assuming an FHA loan
• Qualification and documentation requirements
• Down payment and mortgage insurance
• The loan assumption process step-by-step
• Alternatives to assuming an FHA loan
• FAQs about assuming FHA loans

What is an FHA Loan Assumption?

An FHA loan assumption allows a new homebuyer to take over the seller’s existing FHA mortgage. This transfers the original loan terms, mortgage balance, interest rate, and repayment period to the new borrower.

Essentially, the assumptor replaces the seller as the borrower on the FHA loan. The assumptor makes the same monthly payments the seller was making before the assumption.

FHA loans originated after December 1989 require lenders to qualify assumptors for the mortgage. So you’ll go through a full credit and income evaluation before assuming an FHA loan.

The Pros and Cons of Assuming an FHA Mortgage

Assuming an FHA loan can make good financial sense in some situations. But it’s not the optimal strategy for every homebuyer.

Here are the key pros and cons to weigh:

Pros

• Lower mortgage rate – You may lock in a rate far below current market rates
• Lower mortgage insurance – Older FHA loans have lower MIP rates
• Lower closing costs – No need to pay for a new appraisal
• Interest savings – Lower rate saves money over loan term

Cons

• Higher down payment – May need 10-15% or more to cover principal paid
• Limited flexibility – Can’t adjust loan amount or terms
• Home equity restrictions – Difficult to tap home equity
• Link to original loan – Issues with initial FHA loan can impact you

As you can see, there are some great potential benefits, but also limitations to be aware of.

FHA Loan Assumption Qualification and Documentation

To assume an FHA mortgage, you must meet all the normal FHA borrower eligibility requirements Here are the key qualification criteria

• Credit score – At least 580 FICO for maximum financing
• Down payment – Typically 10-15% or more of home value
• Debt-to-income ratio – Less than 43% total DTI
• Work history – 2 years of consistent employment
• Income limits – Must meet FHA income limits

In addition to standard documentation like pay stubs, tax returns, and bank statements, you’ll also need:

• An executed buy-sell agreement with loan assumption contingency
• FHA loan assumption agreement signed by seller and assumptor
• Any required gift documentation if receiving gifted funds

Overall, plan to provide the same documentation as any other FHA buyer. The key is meeting the minimum 580 credit score requirement.

Down Payment Amounts and Mortgage Insurance for Assumed FHA Loans

Down payment requirements are a critical difference with an FHA loan assumption.

Unlike a new FHA loan with a 3.5% down payment, you’ll likely need 10-15% or more as the down payment when you assume the mortgage.

Here’s why:

The seller has been paying down their mortgage principal over the years. This reduces the loan balance you’ll be assuming.

And the home value likely appreciated since the seller purchased it originally.

Together, this creates a gap between the mortgage amount and the new purchase price. Your down payment covers this difference.

For example:

• Original FHA Loan Amount: $200,000
• Original Value: $207,500
• Original 3.5% Down Payment: $7,250
• Current Mortgage Balance: $185,000
• Current Home Value: $220,000
• Your Down Payment: $35,000 (15% of $220,000)

A larger down payment is often needed to assume an FHA loan. But mortgage insurance requirements remain the same.

You’ll take over the seller’s existing mortgage insurance premiums (MIP). MIP is required for the life of all FHA loans.

Step-by-Step Process to Assume an FHA Mortgage

If you’ve found an assumable FHA mortgage and are ready to move forward, follow this process:

1. Review the mortgage documents – Confirm the loan can be assumed. FHA loans after 1989 are assumable but check for restrictions.

2. Coordinate with the seller – They must agree to the assumption and cooperate fully with the process.

3. Find a lender – Any FHA approved lender can process the assumption.

4. Complete the loan application – Apply as you would for a new FHA mortgage.

5. Get fully approved – The lender will underwrite and approve your credit, income, assets, etc.

6. Obtain mortgage commitment – This confirms you meet all requirements to assume the specific FHA mortgage.

7. Sign assumption agreement – Formal legal agreement transferring loan obligations to you.

8. Finalize down payment – Wire funds and provide paperwork showing the down payment source.

9. Close on the home – Finish the assumption by signing final documents at closing.

Then, you’ll start making the existing monthly mortgage payments and adhere to all other loan requirements.

Alternatives to Assuming an FHA Mortgage

Assuming an FHA loan isn’t the right solution for every homebuyer. Here are a few alternatives to consider:

• New FHA loan – If you qualify, taking out a new FHA mortgage may offer more flexibility and possibly a lower rate.

• Conventional 97 mortgage – Allows 3% down payment on a conventional loan with less mortgage insurance.

• FHA streamline refinance – Refinance an existing FHA mortgage you already own into a new loan.

• VA or USDA loans – Check if you qualify for these other government-backed mortgages.

• Down payment assistance – Grants can help cover your down payment on an FHA or conventional loan.

• Lower purchase price – Buying a less expensive property can reduce the down payment needed.

FAQs About FHA Loan Assumptions

Here are answers to some frequently asked questions about assuming FHA mortgages:

Can I assume an FHA mortgage without a credit check?

No. The lender will run your credit and underwrite you fully to approve an FHA assumption.

How much are closing costs on an FHA assumption?

Around 2-5% of the loan amount, but you may save on appraisal fees.

Can I get a co-signer on an assumed FHA loan?

No, only one person can assume the mortgage. Co-signers are not allowed.

Can my spouse assume my FHA mortgage after a divorce?

Yes, the divorce decree can require transfer of ownership and loan assumption.

Can I assume a parent’s FHA mortgage after their death?

Yes, but you’ll need to provide the lender with a copy of the death certificate.

Can I assume an FHA loan that is delinquent?

No, the loan cannot have any late payments or defaults. It must be in good standing to be assumable.

The Bottom Line

Assuming an FHA loan allows you to take over the seller’s existing mortgage. This can lock in a favorable interest rate and terms. But a larger down payment is usually needed and full qualification is required.

Carefully weigh the pros and cons for your situation and goals. Be sure to consider alternative options too before deciding if assuming an FHA mortgage is your best route to homeownership.