Assuming a loved one’s FHA mortgage can be a smart financial move, especially if the loan comes with a lower interest rate than current market rates. The FHA (Federal Housing Administration) allows qualified individuals to assume an existing FHA loan, which means you take over the remaining balance, terms, and interest rate. Here’s everything you need to know about how to assume your loved one’s FHA mortgage and what steps to take.
Why Would You Want or Need to Assume an FHA Mortgage?
There are several common scenarios where assuming a loved one’s FHA loan makes sense:
1. Keeping the Home in the Family
If a family member passes away or wants to transfer ownership, assuming the FHA loan allows you to keep the home in the family without needing to refinance. This can be especially helpful in preserving sentimental family properties.
2. Divorce or Separation
In cases of divorce or separation, one spouse may wish to remain in the home while the other is removed from the mortgage. Assumption allows one party to take full financial responsibility for the loan while maintaining the original terms.
3. Inheriting Favorable Loan Terms
One of the biggest advantages of assuming an FHA loan is retaining the original terms, including a lower interest rate. If the current mortgage has an interest rate significantly below today’s market rates, assuming the loan can save you thousands over the life of the loan.
4. Avoiding Closing Costs of a New Loan
Assuming a mortgage typically comes with lower fees compared to taking out a new loan. For buyers trying to minimize upfront costs, an assumption can be a cost-effective option.
5. Financial Necessity
If your loved one can no longer afford the mortgage payments due to financial hardship, health issues, or job loss, assuming the loan can prevent foreclosure while allowing you to take over the property.
What Is an FHA Loan Assumption?
An FHA loan assumption allows a qualified borrower to take over an existing FHA loan, including its terms, remaining balance, and interest rate. This can be particularly advantageous if the current loan has a low fixed rate compared to today’s market rates. FHA loan assumptions are especially common in cases of inheritance, divorce settlements, or when family members want to pass along their property to loved ones.
Can You Assume Any FHA Mortgage?
Not all FHA mortgages are assumable. For an FHA loan to be assumable, it must meet certain conditions:
Loan Must Be FHA-Backed: Only FHA-insured loans are eligible for assumption.
Lender Approval Required: The FHA lender must approve the assumption, and the new borrower (you) must meet specific qualifications.
No Late Payments: The mortgage must be in good standing, with no history of missed payments.
Steps to Assume Your Loved One’s FHA Mortgage
1. Confirm the Loan Is Assumable
Start by verifying with the current lender that the FHA loan is assumable. Check the original loan documents or contact the lender to ensure the assumption clause is included in the agreement.
2. Qualify With the FHA Lender
Even though it’s an assumption, the lender will still require you to qualify as the new borrower. This involves:
Credit Check: You’ll need a credit score that meets FHA guidelines (typically at least 580, though some lenders may require higher).
Debt-to-Income Ratio: Your DTI ratio must meet the FHA’s requirements, usually not exceeding 43%.
Income Verification: The lender will verify your income to ensure you can afford the mortgage payments.
3. Submit an Assumption Application
Work with the lender to complete the necessary paperwork. The application will include financial documents, proof of income, and other details to determine your eligibility to assume the loan.
4. Pay Any Fees
FHA loan assumptions typically involve a processing fee charged by the lender. This fee is generally lower than the closing costs for a new loan but varies depending on the lender.
5. Complete the Assumption Process
Once approved, you’ll officially take over the loan. This includes assuming responsibility for the remaining mortgage balance, interest rate, and terms. At this point, the title will also transfer into your name, making you the new homeowner.
What Are the Benefits of Assuming an FHA Loan?
Lower Interest Rates: You inherit the original loan’s interest rate, which may be lower than today’s rates.
Reduced Closing Costs: Assumptions often come with fewer fees compared to obtaining a new mortgage.
Simplified Process: Assuming a mortgage can be faster and less complicated than applying for a new one.
Potential Challenges to Consider
Lender Approval: You’ll need to meet the lender’s qualifications, which may include stricter criteria than FHA’s baseline guidelines.
Equity Payment: If the home’s value has increased significantly, you may need to pay the difference in cash or secure a second loan to cover the equity.
Mortgage Insurance: FHA loans require mortgage insurance premiums (MIP), which will continue after the assumption.
Ready to Assume an FHA Loan? Let Us Help!
At 14 Days To Close, we specialize in navigating FHA loans and can guide you through the assumption process quickly and easily. Whether you’re taking over a loved one’s loan or exploring other FHA options, we’re here to help every step of the way.
Call us today at (813) 340-6223 or start your application online at https://www.14daystoclose.com/prequal.
Let’s make the transition into your new home seamless!