FHA home loans permit the home owner to have the mortgage assumed by another person, who would become the owner of the property and financially responsible for the mortgage. FHA home loans were, long ago, considered “freely assumable” with no real participation required of the lender. Later, the FHA loan rules changed to require lender participation and approval of an FHA loan assumption.
Late last year, the FHA and HUD issued HUD 4000.1, which is the definitive rule book and policy manual for the FHA single family home loan program. Many changes, updates, and restatements of FHA/HUD policies were published in HUD 4000.1, and we’ve been examining some of the most important passages in the new rule book to help borrowers, lenders, and real estate agents stay current on FHA loan guidelines.
When it comes to FHA loan assumptions, HUD 4000.1 starts off by defining its terms. “Assumption refers to the transfer of an existing mortgage obligation from an existing Borrower to the assuming Borrower.” Simple enough, but there have been changes to FHA loan rules that affect all FHA loan assumptions with applications taken on or after September 14, 2015. According to HUD 4000.1:
“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. If the original Mortgage 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.”
There are restrictions on the loan-to-value ratio for those assuming FHA loans as either an investment property or secondary residence under the conditions described above. “The maximum Loan-to-Value (LTV) for an Investment Property assumption is 75%. Either the original appraised value or new Property Value may be used to determine compliance with the 75% LTV limitation.”
When it comes to secondary residences, FHA loan rules state, “The maximum LTV for a HUD-approved Secondary Residence assumption is 85%. Either the original appraised value or new Property Value may be used to determine compliance with the 85% LTV limitation.”
Is a borrower assuming an FHA loan for a primary residence required to make a down payment? HUD 4000.1 states, “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” as mentioned above.
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