I’m going to let you in on a secret—really, most people don’t know about it. Did you know that FHA loans (these loans are backed by the federal government) are assumable?
An assumable mortgage lets the buyer take over the seller’s interest rate, current payment amount, repayment period, and any other applicable terms of the mortgage. The buyer does not obtain a brand-new mortgage. Also, FHA loans can be assumed even if the house isn’t sold (like if there’s a divorce or someone wants to give the house as a gift). Here’s how a buyer can take over a seller’s loan.
What is an FHA Loan?
An FHA mortgage is a mortgage that is secured by the federal government, specifically the Federal Housing Administration. Basically, this means that if a borrower quits paying and loses their home in a foreclosure, the government will make sure the lender doesn’t suffer any losses.
FHA loans require:
- A minimum credit score of 620 (in most cases)
- Mortgage insurance for the life of the loan (if you’re assuming a loan that originated before this requirement was added, you may not have to pay mortgage insurance for the life of the loan)
- That the property meets minimum standards
- A debt-to-income ratio of no more than 43%. This means that if you make $5,000 a month, no more than $2,150 of that can go toward debt payment, including the mortgage.
Considerations for Buyers
There are both advantages and disadvantages for buyers who take over a seller’s FHA loan, and it can be a complex situation. If you need help, I’m here to talk through it with you.
Advantages
- The biggest advantage of taking over another person’s loan is the possible interest rate savings. If current interest rates are 6%, but your seller got a 4% interest rate, that’s a pretty substantial savings throughout the life of the loan.
- Closing costs are often lower for an assumed loan than they are for a brand-new one, as well.
- If you assume a mortgage, you usually don’t have to get an appraisal on the house, saving you the appraisal fee (though you may opt to get one to ensure that you’re not overpaying for the home).
Disadvantages
- You still have to meet all of the lender requirements that you would have to meet if the loan were a brand-new one, and this means that you’ll need to use the same lender that the seller originally used.
- If the seller has a lot of equity in the home, you’ll have to either come up with a hefty down payment or take out a second mortgage, which comes with its own advantages and disadvantages (especially if the second mortgage is from a different lender).
Considerations for Sellers
Advantages
- If your loan has especially favorable terms and you have little equity, your home may be more marketable than other, comparable homes.
- An assumable mortgage may give you more negotiating power on price.
Disadvantage
- You’ll have to make sure the lender releases you from liability for the mortgage. If you’re not released from liability, you could be responsible for payments if the assuming borrower defaults on the loan. A default will also really damage your credit rating.
A Note of Caution
You should never enter into an arrangement where someone else assumes your mortgage without a lender. If a seller told someone to move in and make payments, they’d basically be a landlord with full responsibility of the mortgage. This isn’t actually an assumable mortgage, and it’s always best to cover your bases by using a lender.
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