How to Assume an FHA Loan: A Step-by-Step Process

An FHA loan assumption allows a buyer to take over a seller’s existing FHA-insured mortgage. This process includes inheriting the remaining balance and original terms. Buyers may find this option appealing as it can potentially secure a lower interest rate than new mortgages available on the market. Additionally, an FHA loan assumption can lead to reduced closing costs compared to a new loan.

Understanding FHA Loan Assumption Requirements

For an FHA loan to be assumed, specific criteria must be met. The assumability of an FHA loan depends on its origination date. Loans issued on or after December 15, 1989, require the buyer to undergo a full creditworthiness review by the lender. While loans originated before this date might still be assumable, the original lender may not be obligated to release the seller from liability. The existing FHA loan must be current on all payments.

The assuming buyer must also meet specific eligibility qualifications. This includes demonstrating an acceptable credit score, typically a minimum of 580. Some lenders may require higher scores. Debt-to-income (DTI) ratios are also a factor, with FHA guidelines limiting the total DTI to 43%.

A stable employment and income history is another requirement, verified through recent pay stubs, W-2s, and tax returns. The assuming borrower must intend to occupy the property as their primary residence, as FHA loans are not assumable for investment properties. The seller is released from liability on the loan once the lender approves the new borrower and the assumption is finalized.

Preparing Your Assumption Application

Before submitting an FHA loan assumption application, gather all necessary financial and personal documentation. Prospective borrowers should prepare recent pay stubs, covering the last 30 to 60 days. Tax returns and W-2 forms for the past two years are also required. Bank statements for the past two to three months will be needed to verify assets.

Beyond income and asset verification, the loan servicer will require authorization to pull the applicant’s credit report. Other asset verification, such as investment account statements, may also be requested.

Information about the existing FHA loan and the property itself should also be collected. This includes the current loan balance, the contact information for the current loan servicer, and the property address. Applicants should contact the current loan servicer to request their specific FHA loan assumption application packet, as forms can vary by institution. Complete these forms with the gathered financial and personal details.

The FHA Loan Assumption Review Process

Submit the application package to the current loan servicer. Submission methods can vary. The servicer will then initiate their underwriting review, an assessment of the submitted materials.

During this review, the servicer evaluates the borrower’s income, assets, and creditworthiness against FHA guidelines and their internal lending criteria. They verify that the applicant’s financial profile aligns with the requirements for loan assumption, including acceptable debt-to-income ratios and credit scores. This assessment ensures the new borrower has the financial capacity to manage the mortgage obligations.

Applicants should anticipate communication from the servicer throughout this period, which can extend from 30 to 60 days, depending on the complexity of the application and the servicer’s workload. The servicer may request additional documentation or clarification on submitted information to complete their review.

The applicant will be notified of the servicer’s decision: approval, conditional approval, or denial. Approval signifies that the borrower meets the necessary qualifications to assume the loan. If conditions are attached, they must be satisfied before the assumption can proceed. In the event of a denial, the servicer typically provides reasons for the decision, which might relate to credit, income, or debt ratios.

Finalizing Your FHA Loan Assumption

Upon receiving approval for the FHA loan assumption, a formal assumption agreement will be prepared. This document legally transfers the mortgage obligation from the original borrower to the new buyer and outlines the terms and conditions of the assumed loan.

The closing procedures for an FHA loan assumption are similar to those of a traditional home purchase. This involves signing legal documents to finalize the transfer of the property title and the mortgage. Any necessary adjustments to escrow accounts will also be made during this phase.

Closing costs are associated with an FHA loan assumption. These costs can include processing fees, which are capped by HUD and may range from $125 to $1,800 depending on the type of assumption. Other potential costs include credit report fees, typically between $30 and $100, and title transfer fees. An appraisal fee may also apply if the lender requires one, usually ranging from $400 to $700.

A primary step at closing is the formal release of the seller’s liability on the loan. For FHA loans originated on or after December 15, 1989, lenders are required to release the original borrower from liability once the new borrower is approved and assumes the debt. This release is documented using HUD Form 92210.1. This ensures the original homeowner is no longer financially responsible for the mortgage.