May 27, 2011
There was a recent question in the comments section of this blog about FHA loan assumptions, so we thought it would be a good time to review the basics.
Assumption of an FHA loan is a process where, according to the FHA official site, “the responsibility of the mortgage is acquired by another person through either Simple or Creditworthiness process.” This means that a potential borrower could take over the FHA mortgage of another borrower, but in some cases the process varies depending on when the FHA insured loan was originated.
The “Simple” assumption process is only for FHA loans originated before December 1, 1986. Loans after that date may also be assumed, but the FHA requires a “creditworthiness assumption process”. Simple assumptions allow the borrower and lender to agree on the loan assumption without prior approval from the FHA.
For all loans after the 1986 cut off date, FHA approval and borrower credit verification are required. The “new” FHA rules governing loan assumption requires the borrower to qualify much in the same way he or she would qualify for any other FHA home loan.
FHA requirements state a loan assumption credit check should be the same as the procedure for any FHA loan application. Loan assumptions can’t offer more lenient credit check policies or more stringent ones.
Under the “Determining if an Assumptor is Creditworthy” rule, “The lender who is the holder or servicer of the mortgage determines the creditworthiness of the assumptor, in accordance with standard mortgage credit analysis requirements. The Direct Endorsement (DE) lender may also use an approved authorized agent to process assumptions.”
Some loans have language in the original contracts that seem to restrict FHA loan assumptions. According to the FHA official site, some loans issued between 1986 and 1989 contained clauses or items that cannot be enforced, even when agreed to in writing by both parties.
In spite of their appearance in the contract, changes to federal law makes loan assumption restrictions non-binding. The FHA states, “Lenders should note that some mortgages executed from 1986 through 1989 contain language that is not enforced, due to later Congressional action. Mortgages from that period are now freely assumable, despite any restrictions stated in the mortgage.”
Joe Wallace has been specializing in military and personal finance topics since 1995. His work has appeared on Air Force Television News, The Pentagon Channel, ABC and a variety of print and online publications. He is a 13-year Air Force veteran and a member of the Air Force Public Affairs Alumni Association. He was Managing editor for www.valoans.com for (8) years and is currently the Associate Editor for FHANewsblog.com.
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