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.
What Is an FHA Loan Assumption?
Imagine being able to take over a home loan from someone else, keeping the original loan terms, the amount still owed, and even the interest rate. That's essentially what an FHA loan assumption is all about. It's like stepping into someone else's shoes when it comes to their mortgage. This can be a real advantage, especially if the original loan has a super low interest rate that's much better than what's available in the market today. FHA loan assumptions often come into play when a home is passed down through inheritance, during divorce settlements, or when family members want to transfer property to their loved ones. It's a way to keep things within the family and potentially save money in the process.
While still uncommon, FHA mortgage assumptions have seen a significant increase in recent years, jumping from 2,550 in 2021 to over 4,000 in 2023. This reflects a growing interest in assumable mortgages as a potential option for homebuyers.
Why Would You Want or Need to Assume an FHA Mortgage?
There are several good reasons to assume a loved one's FHA loan. It's a way to keep a family home in the family without refinancing. It can help in divorce or separation when one spouse wants to keep the home. You can inherit a lower interest rate which saves money. It helps avoid higher closing costs of a new loan. And, if a loved one is struggling financially, it can help prevent foreclosure while you take over the property. But just how impactful can assuming a mortgage be? The story of Wes Van Dell and his wife illustrates the potential benefits in a real-world scenario. 👇
Can You Assume Any FHA Mortgage?
While the idea of assuming an FHA mortgage sounds great, it's important to know that not every FHA loan is assumable. There are a few key things that need to be in place for a loan to be eligible for assumption. First of all, the loan must be backed by the Federal Housing Administration (FHA) itself. Secondly, you can't just assume a loan automatically; the FHA lender has to give their stamp of approval. This means you, as the person wanting to assume the loan, will need to meet certain qualifications to show you're a responsible borrower. And lastly, the existing mortgage needs to be in good standing.
Think of it like taking over a car lease – the payments need to be current, with no history of late payments, to make the assumption process smooth.
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?
There are some great reasons to assume an FHA loan. You could get a lower interest rate than current market rates. You'll likely have fewer closing costs compared to a new mortgage. And, the process can be simpler and faster than getting a brand new loan.
Potential Challenges to Consider
Keep in mind a couple of things. You still need lender approval, and they might have stricter requirements. If the home's value has increased a lot, you might need to pay extra for the equity. Also, remember that mortgage insurance (MIP) on FHA loans continues even after assumption.
Want to talk about it?
We'd love to walk you through your options - even opportunities you may not have yet considered. Whether you're just starting out or need a second opinion, we're here to help!
What's the biggest factor making you consider assuming an FHA mortgage?
Lower Interest Rate
Saving on Closing Costs
Keeping a Family Home
Avoiding Refinancing