An FHA loan assumption is a situation where a new FHA borrower takes over or assumes the debt on an existing FHA home loan started by another borrower. According to the FHA official site, the specific definition of an FHA loan assumption reads, “Assumption of an FHA-insured mortgage is a servicing function where the responsibility of the mortgage is acquired by another person through either Simple or Creditworthiness process.”
Those two options, “simple” and “creditworthiness” can be confusing to new borrowers at first, but these two terms are simple to understand. If an FHA borrower wants to assume an FHA mortgage originated December 1, 1986 or earlier, the “simple” process is used. This means the loan can be assumed without prior approval from the FHA.
For all loans originated after December 1, 1986, the rules are different because the Department of Housing and Urban Development put restrictions on loan assumption. The Creditworthiness loan assumption process requires the person assuming the loan to have their credit history reviewed as with other FHA home loans.
Depending on the date of the original FHA loan, there are occupancy requirements that range from 12 months to the lifetime of the assumed loan. For many assumed loans, the borrower must not be an investor–that is, someone who doesn’t intend to live on the property full time. (Such restrictions usually coincide with the “lifetime of the loan” occupancy requirement). In other cases investors are discouraged, but not prohibited from assuming an FHA loan by the terms of the assumption.
Assumed loans don’t automatically relieve the original owner of financial responsibility for the loan. If the original borrower chooses to let a family member assume the loan in order to avoid foreclosure, for example, and the person who assumed the loan defaults on the mortgage, the original borrower can be adversely affected. Novation, where the lender releases the original mortgage holder, must be requested and approved or the original loan holder remains liable.