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There's a new platform in town for irresponsible financial advice: Tik Tok. From day-trading options courses to "how to hack your checking account," there is content galore for you to pay someone else on a course on how to lose your own money. However, there is a new trend on the financial side of Tik Tok that did catch my eye: mortgage home loan assumption, specifically on the topic of FHA loans.
If you're considering buying a home with an FHA loan, you may be wondering whether the loan is assumable. An assumable loan is one that a new borrower can take over from the original borrower, mortgage payments, interest rates and all. In this article, I'll explain what an FHA loan is, how assumability works, and what you need to know about assuming an FHA loan.
What is an FHA Loan?
An FHA loan/ FHA mortgage is a mortgage loan that is insured by the Federal Housing Administration (FHA). FHA loans are designed to help people with low or moderate incomes and limited credit histories to buy homes. It's effectively a version of VA loans for those of us that weren't brave enough to serve in the military.
FHA loans have lower down payment requirements and more flexible credit score requirements than conventional loans, making them an attractive option for many homebuyers (especially now that home prices have rocketed to all-time highs and monthly payments are starting to look like zip codes).
FHA loans are issued by private lenders, but they are backed by the FHA. This means that if the borrower defaults on the loan, the FHA will reimburse the lender for a portion of the loss. Because of this insurance, lenders are more willing to lend to a home buyer with lower credit scores and smaller down payments.
FHA loans come in several different varieties, including fixed-rate and adjustable-rate mortgages. They can also be used for various purposes, such as purchasing a home or refinancing an existing mortgage. However, you cannot use an FHA loan for a second mortgage, which means you can't game the system on attempting to get lower payments on that beach house you've been eyeing.
What is Loan Assumability?
Loan assumability is a feature of some types of loans that allows a new borrower to take over the loan from the original borrower. In essence, the new borrower steps into the shoes of the original borrower and takes over the seller's mortgage, including existing loan balance, interest rate, and repayment period.
Assuming a loan can be an attractive option for a new borrower for several reasons. First is the potential for a lower interest rate. If the interest rate on the existing loan is lower than current interest rates, the process of mortgage assumption can save the new buyer money on interest over the life of the loan.
Second, assuming a loan can be easier than applying for a new loan, especially if the new borrower has a limited credit history or income.
However, assuming a loan is not without risks. The new borrower is taking on the existing mortgage balance, which means that if the original borrower had missed any payments or had defaulted on the loan, the new borrower would be responsible for those debts. Additionally, assuming a loan may require the new borrower to pay a fee to the lender for processing the assumption.
Are FHA Loans Assumable?
Yes, FHA loans are assumable, but not all FHA loans are freely assumable. FHA loans that were originated before December 1, 1986, are freely assumable without the need for the new borrower to qualify for the loan. This means that if you're buying a home with an FHA loan that was originated before December 1, 1986, you can assume the loan without having to go through the typical loan application process. However, this can be dangerous. The mortgage qualification process exists for a reason: debt-to-income ratio. Essentially, banks want to make sure that you are actually going to be able to afford the home, which got way more stringent after the events of the Fannie Mae 2008 crash. Assuming a loan on your own with no pre-qualification process means you could be on the hook for a home you can't afford.
FHA loans that were originated after December 1, 1986, are assumable only if the lender approves the assumption and the new borrower meets the current FHA underwriting guidelines, similar to conventional mortgages but with greater flexibility. This means that the new borrower would need to go through the same application process as if they were applying for a new loan. The mortgage lender would need to review the new borrower's credit history, income, and other financial information to determine whether they are qualified to take over the existing loan. Pending lender approval, get ready to dive into the world of assumable mortgage loans you clever house hacker!
If you're considering assuming an FHA loan, there are a few things you should know:
Verify the loan's assumability: Before you make an offer on a home with an FHA loan, make sure to confirm whether the loan is assumable. You can do this by checking with the lender or reviewing the loan documents.
Determine whether the loan is freely assumable: If the loan was originated before December 1, 1986, it may be freely assumable, which means that you won't need to qualify for the loan. However, if the loan was originated after that date, you'll need to go through the typical loan application process.
Consider the interest rate: If the interest rate on the existing loan is lower than current rates, assuming the loan could save you money on interest over the life of the loan. However, if the existing loan has a higher interest rate than current market rates, assuming the loan may not be the best financial decision, and a new mortgage might be your best bet.
Check the loan's payment history: Before assuming an FHA loan, review the payment history on the original mortgage to make sure that the original borrower has been making payments on time. If there are any missed payments or defaults, you'll be responsible for those debts, and that could ding your credit report moving forward.
Qualify for the loan: If the loan was originated after December 1, 1986, you'll need to qualify for the loan by meeting the current FHA underwriting guidelines. This means that the lender will review your credit history, income, and other financial information to determine whether you're qualified to take over the existing loan.
Conclusion
Assuming an FHA loan can be a smart financial decision if the loan is freely assumable and the interest rate is lower than current market rates. However, assuming a loan is not without risks, and it's important to carefully review the loan's payment history and qualifications before making a decision.
In conclusion, FHA loans are assumable, but not all FHA loans are freely assumable. If you're considering assuming an FHA loan, make sure to verify the loan's assumability and carefully review the loan's payment history and qualifications. By doing so, you can make an informed decision that is right for your financial situation.
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