Sometimes a homeowner decides they don’t want a particular home any longer.
Some choose to sell, others choose to have their home loan assumed by another person, which is not quite the same as selling the home but has the same intended result–the new owner becomes financially responsible for the mortgage and the property.
When you want to have your FHA home loan assumed, you’re required to get the participation of the lender in most cases. There are rules in HUD 4000.1 that govern loan assumptions, they begin with the agency’s definition of the term:
“Assumption refers to the transfer of an existing mortgage obligation from an existing Borrower to the assuming Borrower.”
Because of certain rule changes that affected the FHA loan assumption rules, HUD 4000.1 has a different requirement for occupancy depending on when the original loan was processed:
“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.” HUD 4000.1 adds:
“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. “
You will need to discuss these rules and your original mortgage loan closing date with the lender to see what occupancy requirement may apply to you based not only on the FHA rules above but also any additional lender requirements.
Investment properties and secondary residence transactions are less common than typical FHA loans, and borrowers should know the FHA loan rules include a maximum Loan-to-Value (LTV) for “a HUD-approved Secondary Residence” assumption is 85% and the original appraised value OR new property value may be used to calculate the 85% LTV.
The maximum LTV for FHA loan assumptions for investment property assumptions. That LTV is 75% and according to HUD, “Either the original appraised value or new Property Value may be used to determine compliance with the 75% LTV limitation.”
You may need to discuss this with your lender to see what procedures are acceptable at that financial institution.
As the original homeowner, it is very important for the person transferring the property to make certain they are released from financial liability as a result of the loan assumption.
There are guidelines for your lender in HUD 4000.1 that include the following instructions:
“The Mortgagee must prepare form HUD 92210.1, Approval of Purchaser and Release of Seller, thereby releasing the original owner when they sell by assumption to the assuming Borrower who executes an agreement to assume the Mortgage and to pay the debt. “
Talk to your loan officer if you are not sure how to properly document and make certain the financial obligation is transferred out of your name once and for all as part of the loan assumption transaction.
We will examine more aspects of FHA loan assumptions in future blog posts.