June 29, 2021
Can I assume an FHA mortgage? That is a question on the minds of those looking to take over an FHA home loan from the original borrower. Loan assumptions are a bit different than a new purchase home loan application, though the borrower must be able to afford the loan in both cases.
The short answer is that yes, in most cases with lender participation you may be able to assume an existing FHA home loan from the original borrower.
A credit check may or may not be required (see below) depending on circumstances, and lender standards.
It’s the lender’s job to determine whether or not the loan assumption will happen-FHA loan rules in HUD 4000.1 permit the assumption of an FHA mortgage, but the process requires the lender’s participation.
FHA Loan Rules For Loan Assumptions
The rules for loan assumptions are found in HUD 4000.1, the FHA Single Family Home Loan Handbook. It begins the section with a basic definition of what the FHA considers to be a loan assumption transaction:
“Assumption refers to the transfer of an existing mortgage obligation from an existing Borrower to the assuming Borrower”.
FHA home Loan assumptions require occupancy in most cases, the same as any other type of FHA mortgage loan. There are some exceptions, so it’s good to know what FHA loan rules say that could affect the process of loan approval.
HUD 4000.1 instructs the lender, “If the original Mortgage was closed on or after December 15, 1989, the assuming Borrower must intend to occupy the Property as a Principal Residence or HUD-approved Secondary Residence.”
Furthermore, in cases where the original home loan “was closed prior to December 15, 1989, the assuming Borrower may assume the Mortgage as a Principal Residence, HUD-approved Secondary Residence or Investment Property.”
FHA Loan Assumption Credit Check Rules
A credit check may or may not be required of the assuming borrower but it’s best to assume there WILL be a credit check. FHA loan rules provide some discretion for the lender in this area.
HUD 4000.1 states, “The Mortgagee may process an assumption without credit review of the assuming Borrower if the transfer is by devise or descent, or other circumstances in which the transfer cannot legally lead to exercise of the due-on-sale…”
That can include situations like a divorce “in which the party remaining on title retains occupancy, and the assuming Borrower can demonstrate that they have made the Mortgage Payments for a minimum of six months prior to the date of application of the assumption.”
It is very important, when reading the passage above, to keep in mind that your participating FHA lender may have requirements above and beyond these rules.
That means a credit check may, while not specifically required by FHA loan rules except as described above, be needed because your lender standards make it a necessity.
FHA Loan Assumption Down Payment Requirements
FHA loan rules state that a borrower may be able to assume an FHA mortgage loan without making a down payment.
According to HUD 4000.1, “The assuming Borrower is not required to make a cash investment in the Property. The assuming Borrower may assume 100% of the outstanding principal balance of the Mortgage, subject to the restrictions on LTV ratio for Investment Properties and HUD-approved Secondary Residences”.
Talk to your loan officer to determine how these rules and other FHA loan assumption requirements may affect your transaction.
Bruce Reichstein has spent over three decades as an experienced FHA and VA home loan mortgage banker and underwriter where he was responsible for funding “Billions” in government backed mortgage loans. He is the Managing Editor for FHANewsblog.com where he educates homeowners on the specific guidelines for obtaining FHA guaranteed home loans.
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