FHA single family home loans are available to any qualified borrower–there are no “first time home buyer” requirements or similar restrictions. But one feature of the FHA loan program some aren’t aware of is the ability to allow their loan to be assumed by another qualified borrower.
Not everyone who buys a home with an FHA mortgage winds up staying in that home for the entire duration of the mortgage. Some sell and move on, others may decide to refinance. Others may encounter situations where they need to allow the loan to be assumed by a qualified third party. What do FHA loan rules say about this process? What kinds of rules govern the assumption of an FHA home loan?
FHA loan rules for assumptions are found in HUD 4155.1 Chapter Seven, which says in part:
“All FHA-insured mortgages are assumable. Mortgages originated before December 1, 1986 generally contained no restrictions on assumability, while those originated after that date have certain restrictions.”
These “milestone” dates for FHA loan assumptions mean different rules may apply depending on the circumstances of the loan assumption. “Depending on the date of the loan origination, the lender may require a creditworthiness review of the assumptor. To determine what restrictions have been placed on the mortgage, the lender must review the mortgage’s legal documents.”
“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.”
For FHA loans closed after a certain date, the credit qualification requirement must be observed. Chapter Seven: “Under the HUD Reform Act of 1989, mortgages closed on or after December 15, 1989 require credit qualification of those borrowers wishing to assume the mortgage. The creditworthiness review requirement spans the life of the mortgage. This requirement applies to both those borrowers who
• take title to a property subject to the mortgage without assuming personal liability for the debt, and
• assume and agree to pay the mortgage.”
While an FHA mortgage can be assumed, when the credit qualification requirement applies, the home loan may not be assumed by investors. “…private investors are prohibited from assuming insured mortgages that are subject to the restrictions of the 1989 act. This restriction applies whether or not there is a release from liability by the lender of the selling mortgagor.”
Do you have questions about FHA home loans? Ask us in the comments section. You can apply or get pre-approved for an FHA loan at FHA.com, a private company and not a government website.