How to Assume an FHA Loan – A Complete Guide

Assuming an FHA loan can be a great way for homebuyers to save money on their mortgage. With interest rates on the rise, being able to take over an existing FHA loan with a lower rate can result in substantial savings over the life of the loan. However assuming an FHA loan also comes with some specific requirements and process steps that buyers need to be aware of. In this complete guide, we’ll cover everything you need to know about how to assume an FHA loan.

What is an FHA Loan Assumption?

An FHA loan assumption allows a qualified homebuyer to take over the remaining balance on an existing FHA mortgage loan. The buyer essentially steps into the shoes of the original borrower, taking over their loan amount, interest rate, and repayment terms.

When you assume an FHA loan, you don’t have to go through the full mortgage application process or get a new appraisal. You simply take over the current loan as-is. This can save time and money compared to getting a brand new FHA mortgage.

Key Benefits of Assuming an FHA Loan

• Lower Interest Rate – This is the biggest benefit. You may be able to lock in a rate that’s much lower than current market rates
• Lower Closing Costs – No need to pay for a new appraisal or other loan fees
• Faster Process – Assumes the existing loan terms so less documentation required

FHA Loan Assumption Requirements

While an FHA loan assumption skips parts of the mortgage process, you still need to meet some requirements

• Credit Score – Must have a minimum credit score of 580
• Down payment – Will likely need to bring extra cash to closing to cover the difference between sales price and loan balance
• Qualification – Still need to provide income/employment verification and meet debt-to-income requirements

The lender will also review the original FHA loan to make sure it’s eligible for assumption. Here are some key criteria:

• Loaned originated after December 1, 1986 (older loans have different rules)
• Loan is for a single-family property that you’ll occupy as your primary residence
• Mortgage is current – no late payments or default
• Original borrower agrees to the assumption

As long as you meet the requirements, the lender should approve you to formally assume the FHA loan.

How Much Down Payment is Needed?

When assuming an FHA loan, you’ll likely need a larger down payment than if you took out a new FHA mortgage. That’s because you’re inheriting the seller’s remaining principal balance, which won’t cover the full sales price.

For example, say the seller paid $200,000 for the home with a 3.5% FHA down payment. Now they want to sell for $220,000 after paying down their loan balance to $190,000.

As the buyer, you’d need to bring $30,000 as a down payment to cover the difference and meet the $220,000 purchase price. That’s over 13% down even though FHA normally only requires 3.5% down.

Always account for this potential gap between the assumed loan amount and sales price when budgeting your down payment.

The FHA Loan Assumption Process

Here are the key steps to assume an existing FHA mortgage:

1. Find a Home – The first step is locating a property owned by someone with an assumable FHA loan

2. Review Loan Details – Work with the seller to get details on their existing FHA loan, including the interest rate, balance, and loan origination date

3. Calculate Down Payment – Determine how much cash you’ll need at closing to cover the difference between the sales price and remaining loan balance

4. Apply to Assume – Submit a mortgage application and documentation to the lender to assume the FHA loan

5. Get Approved – The lender will underwrite you and issue an approval once you meet all requirements

6. Close on Sale – Finally, close on the home purchase and formally assume the new FHA mortgage

It’s critical that the seller is cooperative and willing to go through the process on their end as well.

Assuming an FHA loan takes coordination between buyer, seller, and lender. But it can be worth it for the potential savings.

Alternatives If You Can’t Assume an FHA Loan

What if you find a home you love, but the seller’s FHA loan can’t be assumed for some reason? You still have options:

• New FHA Loan – Get a new FHA mortgage if you qualify. You’ll have normal 3.5% down but likely a higher rate.

• FHA Streamline Refi – If already have an FHA loan, do a streamline refinance into a new loan on the home.

• Conventional Loan – See if you can qualify for a conventional mortgage with good credit and larger down payment.

• Seller Financing – Ask the seller to provide financing with you making payments directly to them.

Don’t give up on a home just because the loan can’t be assumed. With some creativity, you can often still find a way to buy it.

Pros and Cons of Assuming an FHA Loan

Let’s recap the key advantages and potential disadvantages:

Pros

• Lower interest rate
• Lower closing costs
• Faster process
• Easier qualifying

Cons

• Larger down payment
• Stuck with FHA mortgage insurance
• Less control over loan terms
• Risks if seller is unreliable

For buyers who can check all the boxes, an FHA loan assumption offers a simpler path to homeownership. But make sure you go in eyes wide open to both the benefits and limitations.

Is Assuming an FHA Loan Right for You?

Assuming an existing FHA loan can be a win-win for both buyers and sellers when done right. As a buyer, ask yourself:

• Do you meet all the FHA requirements?
• Can you afford a larger down payment if needed?
• Are you comfortable inheriting the loan terms as-is?
• Is the seller willing and able to cooperate?

If you answered yes, then assuming an FHA mortgage could be a great option, especially when rates are high. But consult a loan officer early so they can guide you through the process.

The bottom line is that FHA loan assumptions remain a viable path to homeownership. This guide covers everything you need to know to assume an FHA loan smoothly and successfully. Just make sure you have a solid understanding of both the benefits and obligations before moving forward. With the right planning and preparation, you can end up with a great home loan and substantial interest savings.