Are FHA Loans Assumable? Yes. Learn How

If you are curious about whether someone else can take over FHA loans, the simple answer is yes. FHA loans can be assumed by another buyer, which could be a great opportunity for you. This loan might have a more favorable interest rate than the current one. According to reports, January 2021 fixed-rate mortgages had an average interest rate of 2.65%, while in February 2024, it averaged at 7.74%. This means that you could benefit from 2021 low-interest rates. However, this loan assumption also comes with responsibilities, restrictions, and requirements.

In this blog, you’ll discover what this loan assumption is, whether you should use it, and how you can apply for it.

What Is FHA Loan Assumption?

When you purchase a property that is currently under a FHA loan, you can transfer the loan to yourself, known as loan assumption. Through this transfer, you inherit the same terms of the original loan. Therefore, you can take advantage of the terms of the older loan rather than attain your own FHA loan.

Nevertheless, there are restrictions that affect whether FHA loans are assumable. For instance, the house needs to meet FHA standards. Though the house originally met those standards for it to receive the first FHA loan, if its condition has changed, that could affect whether you can transfer the loan.

How to Assume an FHA Loan

If you want to buy a home that has an FHA loan and continue to use that loan, you’ll need to go through these steps:

• Find a Home with an FHA Loan

For you to assume this loan, you’ll first need to find a home that currently has an FHA loan. You can find this type of home in market listings. Alternatively, you can ask a real estate agent to show you properties that have FHA loans.

• Make an Offer

Once you’ve picked a home with an FHA loan, you’ll need to make an offer. After the seller accepts it, you’ll have secured the property and will be able to get your affairs in order for the closing.

• Meet the Assumption Requirements

After the seller has accepted the offer, you can begin arranging your finances so that the lender will approve the assumption. While different lenders may have different requirements, you’re likely to need the following information that proves you’re a trustworthy borrower:

• Credit Score Check: You’ll need a score of 620 or above for you to qualify.
• Low Debt-to-Income Ratio: For you to receive the FHA loan, you’ll need to have low debt compared to your income to prove you can repay the loan.
• FHA or HUD Approval: Though FHA loans are assumable, you still need permission from either the Federal Housing Administration or the US Department of Housing and Urban Development to transfer the loan.

Besides, you’ll need to submit documentation proving the above to the lender. However, if the house you’re buying has an FHA loan from before 1986, you won’t need to involve the lender in the transfer.

• Collect the funds

Once you’ve met the requirements, you should ensure you have the funds to buy the house and make the monthly payments. In particular, you should ensure that you have enough funds to cover the down payment, which is likely higher than that of the original FHA loan. While FHA doesn’t require you to pay a down payment when you’re assuming a loan, the lender might demand it. Additionally, you should keep in mind the other closing costs, which may include an appraisal.

• Apply for the Loan Assumption

Now that you’re sure you can afford this purchase, you’ll apply for this loan assumption. You’ll apply using the same lender that gave out the initial FHA loan.

• Close The Home Purchase

Finally, you can close your purchase now that you’ve received your approval from the lender. After you’ve finalized the purchase, you’ll need to make the monthly payment until you have cleared your debt or otherwise settled or refinanced it.

Should You Assume an FHA Loan? 

Now that you understand that FHA loans are assumable, you might wonder whether you should transfer an FHA loan. If you have had a death in the family, you can transfer this loan to ensure you keep a hold of your home as you keep repaying the loan. And if you enter a civil union, you can simplify helping your spouse pay off the loan by transferring the loan to you.

Pros:

If you’re not related to the homeowner, you can assume the loan and get these benefits:

• Lower Interest Rates: The loan keeps the same interest as in the initial loan terms. Therefore, if current interest rates are higher than those in the FHA loan, you’ll spend less on monthly payments with a loan assumption.
• Lower Closing Cost: As you close the purchase, the costs may be lower. This could be because you might not need an appraisal or because the FHA doesn’t require a down payment.

Cons:

Nevertheless, assuming a loan has these drawbacks:

• You Can’t Select a Lender: Even if another lender on the market is ready to give you a more favorable rate, you can’t transfer the loan through them. So long as the lender created the FHA loan after 1986, it’s only the original lender who can legally transfer the loan from the seller to you.
• Higher Down Payment: You may have to pay a higher down payment on this home.
• Higher Cost: If the house has a large equity, then you’ll have to pay more in total.
• Restricted Property Use: You have to use the property as a residence unless the lender closed the original FHA loan before December 15, 1989.

Ultimately, you’ll need to measure the possible benefits and drawbacks to know if this assumption works with your budget.

Conclusion

Now you know that all FHA loans are assumable, though you need to meet certain requirements to qualify for them. Once you’ve proven you can afford the loan and that you’re a trustworthy borrower, you’ll apply for the loan assumption. Then, you’ll close the deal and begin your monthly payments.

Loan assumption can reduce the overall cost of your new home, but you should keep in mind the restrictions it comes with, too. For instance, you’ll have to pay a higher down payment, use this property as your main residence, and make this transaction through the original lender. Moreover, make sure to consider both the benefits and drawbacks of loan assumption before you purchase your next home.