“Are FHA loans assumable? The short answer – Yes, FHA loans are assumable. However, there are a ton of things that you need to learn about FHA loan assumptions before moving forward. This article discusses and elaborates a few important aspects of assuming an FHA loans that you need to essentially know about.”
In an ordinary situation of buying a home, a prospective buyer without an all-cash offer would normally seek external financing sources to fund their home purchase. This usually means applying to a mortgage lending entity for a fresh new loan.
However, this is not necessarily the case always in every situation of home purchase using external financing. In other words, prospective homebuyers have an alternative option as well rather than applying for a fresh new mortgage.
Assumable mortgages, assuming a mortgage loan, or mortgage loan assumption – all three-meaning same – is the alternative method to applying for a fresh new mortgage loan. However technically, not all mortgages or home loans are assumable. For instance, conventional loans typically are not assumable. Contrary to this, three common types of assumable loans are FHA loans, VA loans, and USDA loans.
Our main topic pick for this article is – Are FHA loans assumable? But in addition to this, we will also discuss how FHA loans assumption work, FHA loan assumption pros and cons, etc. Continue reading further to learn more about – Are FHA loans assumable and these related topics.
What are assumable loans?
Before moving on to the main topic – are FHA loans assumable – it is important to first review the definition of an assumable loan briefly.
An assumable loan or mortgage is an existing outstanding loan or mortgage of another borrower that can be assumed by a new or prospective borrower.
In other words, assuming a mortgage or loan simply means taking over or transferring an existing outstanding mortgage from one borrower to another person. Of course, the new or prospective borrower must qualify and be eligible to take over and continue paying the existing mortgage payments of the last or original borrower.
In the case of real estate mortgage assumptions, it is the seller of a house from whom an eligible buyer takes over or assumes the outstanding mortgage on the property being sold.
By assuming the existing outstanding mortgage of the seller, the buyer thus accepts all the terms and conditions of the existing mortgage or loan. Not only this but the buyer is also entitled to enjoy most of the benefits of the assumed loan that the original borrower had access to. For example, a lower than the market interest rate, no closing costs, requiring no private mortgage insurance, etc.
What is an FHA loan?
FHA stands for “Federal Housing Administration”. An FHA loan is a type of mortgage backed by the Federal Housing Administration itself. While the FHA or Federal Housing Administration insures FHA loans, the FHA itself does not lend these loans. Instead, FHA loans are issued, underwritten, and administered by FHA-approved mortgage lenders such as banks.
FHA loans tend to be popular among first-time homebuyers for three prominent reasons. First, FHA loans require a lower credit score which means they carry less restrictive credit requirements. Second, they also require a lower down payment which can be as low as 3.5%. Third and last, there are no low-to-moderate-income restrictions attached to FHA loans as well.
In comparison, conventional loans have stricter credit requirements and require a higher down payment. Moreover, conventional loans also mention low-to-moderate-income restrictions as well. This is particularly true in the case of conventional loan programs requiring low down payments.
Besides first-time homebuyers, FHA loans can also be applied for by persons who either currently or previously owned a home. FHA loans can be used for either buying a home, refinancing an existing outstanding mortgage, or home renovations.
A quick view on FHA loan assumption or assuming an FHA loan
Normally, most government-guaranteed or insured loans such as VA loans, USDA loans, and FHA loans are assumable. However, there are certain considerations that the lender of the original borrower will go through before allowing a new eligible homebuyer to take over an assumable loan.
Similarly, while all FHA loans are generally assumable, each sale transaction involving an FHA loan assumption does require the approval of the lender. This approval process usually involves reviewing a few key factors such as the date of the original loan. The lender of the original borrower will check the date and ascertain its probable effect on the FHA loan assumption.
What this means is that based on the date when the original loan was issued, the borrower and the homeowner may be required to fulfill different approval criteria.
For instance, an FHA-backed mortgage issued before December 1, 1986, will generally contain no specific restrictions regarding FHA loan assumptions. The HUD 4155.2 Chapter Three explains the standard which if fulfilled, renders an FHA loan as “freely assumable”.
On the other hand, all FHA loan applications signed on or after December 15, 1989, require the lender’s involvement during their assumption process. Among other things, a lender will also check whether the new borrower applying for an FHA loan assumption has an acceptable credit risk or not.
In normal circumstances, a lender must approve a sale involving an FHA loan assumption depending on the buyer having acceptable creditworthiness. However, there are a few exceptional circumstances as well. For example, in the case of death and inheritance, the lender neither has the right to investigate the creditworthiness of the buyer nor must approve the sale.
Are FHA loans assumable – How do FHA loans assumption work?
How to qualify for an FHA loan?
Yes, FHA loans are typically assumable. Further, most FHA loans come with a 15- or 30-year loan term and will usually carry a fixed-interest rate.
For an FHA loan assumption to work, a person should ideally match the standard FHA loan requirements. This means that whether a person is seeking to obtain a fresh FHA loan or planning to assume an FHA loan, the set of FHA loan features or requirements remains the same in each case.
Remember that an FHA loan assumption considers the current status of the outstanding FHA loan as well as the creditworthiness of the new or prospective borrower at the time of applying.
Eligibility requirements to qualify for an FHA loan assumption
The following list mentions the basic requirements or features of an FHA loan that must be met by a borrower to qualify as an eligible FHA loan applicant –
- Can make a 3.5% as a minimum down payment if having a FICO (Fair Isaac Corporation) score of 580 or higher.
- Can make at least 10% down payment when having a minimum FICO score between 500 to 579.
- Able to furnish the last two years’ verifiable employment history.
- Able to provide a verifiable means of income. Such as through federal tax returns, bank statements, and pay stubs showing their taxes, contributions, and deductions.
- Intends to use the loan to purchase a primary residence.
- Confirms the maximum limits of front-end debt ratio and back-end debt ratio. The front-end debt ratio should not be above 31 percent of their monthly gross income. Similarly, the back-end debt ratio should not be above 43 percent (50 percent – in some cases) of their gross monthly income.
- Make sure that the property being bought is appraised by an FHA-approved appraiser. In addition, it also meets the HUD guidelines.
- The application for FHA loan assumption is being made after a minimum of one to two years of the applicant’s bankruptcy. Or in the case of a foreclosure, at least three years have passed. Lenders, in certain exceptional circumstances, may relax these waiting periods.
Types of FHA loans
The Federal Housing Administration or FHA offers a few other types of mortgage loan programs besides the standard FHA loans for home purchases and refinancing. These other FHA loan programs facilitate different financial needs of homeowners and homebuyers at various times in their lives.
Here is a quick rundown of these different FHA loan types.
FHA Cash-out Refinance
With FHA cash-out refinance, a borrower having a low score, but which is not less than 500, can borrow funds up to 80% of their home’s value.
FHA Streamline Refinance
The FHA streamline refinance program allows eligible borrowers with an existing FHA loan, to obtain another FHA loan with better terms. This means bypassing the requirement to provide income documentation and a home appraisal.
FHA Rate-and-Term Refinance
With the FHA rate-and-term refinance program, an existing FHA or non-FHA loan can be refinanced. This program allows refinancing limits of up to 97.75 of a person’s home value with low credit scores. This program also allows the flexibility to add the closing costs to the loan amount.
FHA 203(k) Loan
With an FHA 230(k) loan, borrowers have the ease of using a single mortgage towards a home purchase and its renovation. FHA 203(k) loan programs come in two types – the limited 203(k) and the standard 203(k).
HECM or Home Equity Conversion Mortgage
Home Equity Conversion Mortgage or HECM is a popular FHA-insured mortgage, also commonly known as a reverse mortgage. Under the HECM program, borrowers aged sixty-two and over can access their home equity without a monthly payment.
Energy-Efficient Mortgage (EEM)
With FHA EEM or energy-efficient mortgage, homeowners can make energy-saving improvements and upgrades to their old homes. In addition, EEM can also be used to purchase homes that are already energy-efficient or refinance a current loan.
Pros and Cons of FHA loans
Advantages and disadvantages of an FHA loan
Just like any other mortgage type, FHA loans also come with their own set of pros (advantages) and cons (disadvantages). Here we briefly mention a few of these.
Pros or benefits of an FHA loan
- Requires a low down payment. This can be as low as 3.5% if the FICO score of a borrower is 580 or above.
- Does not need a high credit score. While ideally having a minimum 580 credit score is best, not having this might still work in some cases. In certain cases, a credit score between 500 and 579 may still make you eligible for an FHA loan.
- Besides the standard FHA loan programs, there are other programs as well to cater to different financing needs of a borrower.
- A prospective borrower need not be a first-time homebuyer to qualify for an FHA loan.
Cons or downsides of an FHA loan
- Insurance premiums can turn out to be a financial burden in the long term for the borrower.
- Price of the property cannot exceed the loan limits set out by the FHA.
- While the interest rates on FHA loans might seem lower, this is not the true picture. A comparison of APR on FHA loans and conventional loans shows that borrowing costs on FHA loans can be higher.
Updated FHA loan limits – 2022 adjusted
As required by law, the FHA adjusts its loan amount limits each year. These loan amounts must correspond with the loan limits prescribed by the FHFA or Federal Housing Finance Agency. The FHFA sets the floor (minimum) and ceiling (maximum) limits of FHA loans for a county after considering the cost of living in that area.
This means that an area or county with a higher cost of living will have higher loan limits and vice versa.
The FHA loan limit for 2022 in most parts of the country is $420,680. This figure previously stood at $356,362 in 2021. Likewise, the FHA loan limit for high-cost areas in now $970,800 for 2022. This amount previously stood at $822,375 in 2021.
Concluding thoughts – Are FHA loans assumable?
FHA loans, just like other types of government-backed mortgages, can be an excellent opportunity for borrowers with low credit scores and insufficient funds to make huge down payments. However, FHA loans can turn out to be taking a toll on your financial strength in the long term.
This is because all FHA loan borrowers must pay two mortgage insurance premiums. Mortgage insurance normally becomes payable on loans where the borrower has made less than 20 percent in down payments.
If you are not sure about how to evaluate your situation to obtain an FHA loan based on the available options, we can help you. AttorneysFunding.com has a team of professional experts and mortgage advisors with decades of experience. Our experts can help you find the best route toward becoming a homeowner while keeping a thorough check on your financial stability.
Call us now at (916) 471-2678 or click here to book a free consultation session and discuss your mortgage needs with one of our expert loan officers.