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How Does a Buyer Assume an FHA Mortgage?

A fully qualified buyer can assume a low-rate FHA loan, but sellers need to get a lender release that guarantees they don’t have any future obligation to repay the loan.

RICHMOND, Va. – Question: There are tons of low-rate FHA mortgages that now finance and refinance homes loans in the 3% range and sometimes lower. Is it possible to assume an FHA mortgage?

Answer: With rates above 6%, there’s no doubt that mortgage interest at 4%, 3% and even in the 2% range are enticing. And yes, there are assumable FHA mortgages out there.

FHA mortgages are “qualified assumptions.” That means a new owner can take over such financing, but only if they meet certain requirements.

First, generally, the new borrower must intend to use the property as a principal residence.

Second, there cannot be an assumption unless the replacement borrower is fully qualified, something determined by the lender. The good news is that the FHA allows credit scores as low as 580 with a 3.5% down payment.

Third, the original borrower must get a lender release from any obligation to repay the mortgage. This is a biggie, because the owner remains responsible for repayment of the loan without a release. If the new owner decides to live at the property and not make monthly mortgage payments, the lender will look to the original borrower for the money if there is no release. Without full and timely payments, the seller’s credit score will plummet.

Even if the new borrower makes the payments, the original borrower’s credit will still suffer without a release. That’s because first borrowers remain responsible for repaying the debt and therefore have access to less credit for themselves.

Fourth, according to HUD, lenders can charge as much as $900 for processing. There may be other costs as well. Ask the lender for a complete list of assumption fees and other expenses.

So, yes, it may be possible to assume an FHA mortgage and such an assumption may be very attractive. However, it may not be a practical choice.

As HUD explains, “a new borrower will need to cover any home value appreciation above the unpaid principal balance on the original mortgage.”

If the assumable FHA loan balance is $300,000 and the property is worth $400,000, the transaction won’t work if the buyer does not have enough cash or secondary financing to bridge the $100,000 difference between the mortgage debt and the sale price. More debt, of course, also means bigger monthly payments and that can make it harder to qualify with the lender.

Lastly, the sellers can get a lot of buyer attention by offering a home for sale with a low-rate FHA assumption. That may mean that purchasers will have to pay a premium to get the property.

For specifics and details, speak with the loan servicer that now collects the monthly mortgage payments as well as local real estate brokers.

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