Higher interest rates in recent years have made low interest rates on assumable FHA mortgages an attractive alternative for home buyers.
Federal Housing Administration (FHA) mortgages are overseen by the U.S. Department of Housing and Urban Development.
In the 22 years ending December 31, 2022, FHA mortgages have accounted for approximately 17% all new loans in the marketplace each year during that time period. The high was 32.6% during the great recession in 2009 (conventional lenders weren’t lending as much) and the low was 4.5% in 2006 (when conventional lenders were lending a lot).
You can see the numbers in more detail by reviewing the latest FHA report.
Digesting all this data we can make a general approximation that roughly 15% of loans in the marketplace today could be FHA loans. Not quite a needle in a haystack, but these mortgages are in the minority.
However, with some perseverance buyers may be able to find sellers who have these assumable FHA mortgages with rates much lower than the typical mortgage loans offered in the market today.
For example, with 30 year fixed market loan rates around 7.5% today, you could drop your monthly payments substantially if you can find a home with a seller that has an assumable FHA loan in the 3 to 4% range (or lower). Using these rates, the 7.5% loan payment on a $300,000 loan would be approximately $2,100 per month compared to a lower rate of 3.5% which would be a loan payment of about $1,350 per month.
Wow, $750 per month savings in this example is huge!
In this article we are referring to buyers of a primary residence, and not an investment property.
Finding an FHA assumable loan
It won’t be easy to find, but as we mentioned before, for every 10 loans out in the marketplace today, 1 to 2 of them will likely be FHA loans. You just need to hunt them down.
The other challenge will be to then find a homeowner that wants to sell their home. In today’s marketplace, with rates going up as fast as they have over the last few years, many sellers are staying put and playing the waiting game, with hopes that rates will come down. These sellers don’t want to give up a low rate mortgage loan and take on a new higher rate mortgage loan.
Pending some catastrophic economic event that will drop interest rates much faster, rates will likely drift lower over the next few years as the Federal Reserve has planned. This could be a long and slow process. Meanwhile, life must go on.
Although sellers prefer to wait, life happens and over time many will likely begin to sell. You want to be heads up for these opportunities if you intend to assume one of these loans.
There are a few ways you can go about locating an assumable FHA loan
- Try asking a family member. You never know who might have an FHA loan.
- Ask a real estate agent to review the Multiple Listing Service (MLS) listings of active homes for sale that have an assumable FHA loan
- Use a service (for a fee) such as withroam.com to locate and close on a home that has an assumable FHA loan
- Call and ask Title companies for leads to get lists of FHA loans so you can contact the current owner and let them know you may be interested in buying their property and assuming their loan
How does a mortgage assumption work?
What you are doing with one of these loans is taking over the seller’s loan as part of the home sale, rather than you taking out a new loan.
Done properly, the seller gets a full release from the loan obligation and you take over the mortgage payments from that point forward.
The HUD reform act of 1989 requires that all FHA loans originated December 15, 1989 and later involve the lender performing a full credit qualification of the new borrower. This is the proper way to do it. Prior to that date, the “freely assumable” FHA loans could be handled between the buyer and seller without involving the lender. This could still leave the seller on the hook for the buyer’s failure to pay. Yikes!
What if the existing mortgage loan balance is too low?
One of the challenges will an assumable loan is that you can’t pick the lender, loan amount, or the remaining mortgage term. Both the lender and the outstanding loan amount will continue on with an assumable loan.
So, for example, if you need to borrow $300,000 but the assumable loan is at $200,000, you’ll need to come up with an additional $100,000 at closing or take out a second mortgage for $100,000 to cover the shortfall. A second mortgage will be a fixed or adjustable-rate mortgage at a much higher rate, so you’ll need to run the numbers on both notes combined to calculate your savings going forward.
Qualifying for an FHA loan assumption
In order to be a qualified buyer to assume an FHA loan, you likely need to meet the following requirements:
- Have a minimum credit score of at least 580
- Have a debt-to-income ratio of no more than 43% (debt is all of your loans including this new assumed loan)
- Lender may have other underwriting requirements
So as you can see, if you have good credit and your debt to income ratio is not too high, you will be in a good spot to assume the loan.
Closing on the home
No matter how determined you are to close on a home, do not buy any real estate without having a thorough inspection performed by a professional! In other words, before you spend hundreds of thousands of dollars on a piece of property, spend $300 – $500 on an inspection to make sure any significant defects are discovered in advance.
Based on the the clause you have agreed to in the contract, you can use the inspection finding to have the buyer fix or compensate you for the defect (sellers right to cure), or you can just walk away from the deal (seller does not have a right to cure).
Also, by assuming a loan you can often save the cost of an appraisal. That is a good savings, but only advised if you are very sure what the home is worth. If there are any doubts, you should pay for your own appraisal. Paying in the hundreds of dollars to make sure you are not making a big valuation mistake is worth the cost and peace of mind.
New Buyer Pros and Cons of an Assumable FHA loan
Pros
- You can save big by getting a loan at a much lower interest rate than today’s market rates
- Closing costs are often lower than originating a new loan
- You often have the option to get an appraisal or not
Cons
- Can be difficult to find both an assumable FHA loan and a willing seller
- The assumable loan amount might not line up with your loan needs, often requiring a higher down payment or second mortgage
- Your repayment period will be whatever is left on the existing mortgage
- You don’t get to pick your mortgage lender as it will be whomever holds the assumable note
- The seller may try to get a higher sale price by offering a low rate assumable loan to buyers
Other assumable loan options
Standard Conventional loans, which represent the vast majority of loans in the marketplace, are rarely assumable.
Using rough estimates, the current loan marketplace of new loans breaks down as follows:
| Loan type | % of new loans | Comments |
|---|---|---|
| Conventional loans | 72% | Rarely assumable |
| FHA loans | 16% | Often assumable |
| VA loans | 10% | Often assumable |
| Other government agencies | 2% | May be assumable |
| 100% |
In addition to FHA loans, as noted in the chart above, the other more common assumable loans include VA loans and USDA loans. These government-backed loans have their own rules and specific requirements to complete the loan assumption process.
Conclusion
If getting a new mortgage loan in today’s market seems out of touch for you, an assumable FHA home loan could be a solution to get you in a new home.
These loans are in the minority so it will require persistence and work to uncover the options. You can also go with a service that can help find these for a fee.
Best of luck!
Executive Summary: How to Save money with an assumable FHA mortgage
- FHA loans are often assumable. Conventional mortgages are not usually assumable.
- FHA loans represent approximately 15% of the loans in the marketplace, or about one or two out of every 10 loans.
- You can save substantially on your monthly payments if you are able to buy a home and assume the seller’s FHA loan
- It won’t be easy as these loans are in the minority. There are ways (including a paid service as noted above) to locate them.
- You will need to go through an approval process, which includes meeting the credit score and debt-to-income requirements
- If the outstanding loan amount does not line up with your needs, you may have to take out a second mortgage loan to make up the difference
- An inspection or appraisal will often not be required, but it’s in your best interest to pay for these anyway in order to ensure you are making a good decision
- There are other assumable loans in the marketplace such as VA loans and USDA loans
