FHA Loan Assumption:
Have you ever purchased something in the confident belief that it was meant for you, and then realize later on that something just doesn’t click or feel right anymore?
Like recently bought shoes or sweaters from a department store, sometimes it takes a while to find our groove and realize that these things aren’t exactly what’s best for us, and that something more suitable out there is a better option.
Loans can be one of them.
Sometimes, people miscalculate how much they are capable of expending or sometimes they just know from the get-go that it’s an arrangement they don’t see finishing.
Whatever your case, it’s reassuring to know that FHA loans can be assumed by another interested borrower should the current debtor back out—a feature that is unavailable in commercial loans. Assumptions usually take place when moms and dads gift their kids a house, or when children acquire a home, or even when couples are forced to divide assets in a divorce. While all these things are not prohibited under loans under the FHA, the new mortgage bearer has to be creditworthy. Assumption loans generally come with quitclaim deeds where one party gives up ownership of the home. A rule is that a loan must first be refinanced in order for the granting party to be released from financial obligations along with the dispensation of ownership.
On top of having to gain approval, the loan assumptor must negotiate assumption terms with the lending institution involved. Logically, it is more alluring to potential borrowers to assume a loan that has lower-priced payments, a smaller interest rate, and only a handful of years left before it is completely paid off, That established, lenders must decide if the succeeding owner is credit-eligible and trustworthy. This process is done the same way beginning loans are underwritten.
How this works is that the succeeding debtor files for a loan assumption similar to filing for a refinance. Contrastingly, no down payment is required and closing costs are integrated in the assumption. The only out-of-pocket expenses present in this arrangement are credit application payments and about $50 to $70 to produce needed forms.
A few conditions on loan assumptions may let the succeeding debtor build an upfront 75% equity of the home for the previous debtor to be released from his obligations. For example, if the value of the house is pegged at $200,000, then the assumptor must pay down the loan to $150,000.
A common misconception with loan assumptions is that once the previous owner has been released, his involvement is removed immediately and entirely from the whole deal. While that is possible, what first happens is that the initial debtor’s duties are not taken from him completely. Instead, the original owner, together with the assumptor, keeps up with the liability of the remainder of the loan. That means this particular loan will appear on both the original and the succeeding owner’s credit reports. Should the assumptor be unable to pay for their dues, the lender will reach out to the original debtor. However, a workaround is available for this set-up. If the original borrower requests for a novation, they me be freed entirely from the loan. For loans applied for during or after December 15, 1989, the FHA will require the lending arm to complete a release form. Loans filed for before the aforementioned date will need the lender to let go of the original debtor in the condition that the assumptor is credit-eligible and permits to take assumption as a whole of the loan in writing.
To clarify, the FHA does not let out cash themselves.
Rather, they only insure mortgages extended by FHA-approved commercial lenders. That said, borrowers who apply for loans that are government-guaranteed will need to pay for a mortgage insurance for the entire duration of the loan. This is put in place to help mitigate the risk lenders face, as many of FHA’s borrowers are people whose FICO credit scores are considered to be low.
If you feel ready to take on a new loan after bankruptcy, don’t hesitate to look for an FHA approved lender to discuss your game plan. To know more about the FHA loan assumption process, click the link!