Do We Need Assumable FHA Mortgages?by Peter G. Miller
July 27th, 2009
I was trolling the Internet and came across a just-written article which discussed the benefits of FHA mortgages. This was interesting, given that the FHA last allowed freely-assumable loans two decades ago. Specifically, FHA mortgages have not been freely assumable since December 15, 1989.
In the case of a free assumption, a home buyer takes over the mortgage from the selling owner. This could be a good selling tool if the existing loan has a low interest rate or the buyer does not want to qualify for financing because with a freely-assumable mortgage the new owner would not need the lender’s permission to take over the loan. In case of default, the lender goes after the buyer who assumed the loan and — if that buyer cannot pay off the debt — the lender then goes after the original borrower.
It used to be that loans were freely assumable, but today virtually all loans are qualified assumptions. With a qualified assumption you need the lender’s approval to take over the loan, approval which is rarely if ever given.
Why did the FHA dump freely-assumable mortgages? Why did conventional lenders and the VA also drop the idea?
This is a case where lenders were being abused. What would happen is that the loan would be taken over by someone who hoped to flip the property or become an overnight millionaire. Reality would set in, payments wouldn’t be made, and the property would be foreclosed at great cost to the lender. Rather than get stuck with big mortgage costs mortgage terms were generally changed so that mortgages could only be assumed by individuals who the lender determined were qualified.
When the new standard began to emerge lenders sometimes did allow assumptions. Since there was not definition of who was qualified or not qualified, lender created such standards as a higher interest rate or a big up-front assumption cost. Those charges, of course, destroyed the very attractions of assumable financing.
Today you often hear people try to get around lender restrictions with a land contract or a wraparound mortgage. A land contract is an installment sale, you only get title to the property after some or all of the payments have been made. With a wraparound deal, the seller keeps the loan in place but charges you the same amount for a loan. Example: There is a $50,000 FHA mortgage on the property at 6 percent. The owner sells you the property and you finance with a $100,000 loan at 7 percent. The seller keeps paying the FHA loan and is now getting 1 percent on $50,000 (the FHA loan) and 7 percent on $50,000.
Some attorneys say that land contracts and wraparound deals are perfectly fine, others disagree. If lenders find out they may try to call the loan since the intent of such arrangements is to transfer title and effectively continue the loan with someone they have not qualified.
The bottom line: If a buyer suggests assuming your FHA mortgage or wants a land contract or a wraparound loan please see an attorney in your community for specific advice. If it was me, I’d just say “no” because I would not want the liability.
As to bringing back FHA loans, it’s not going to happen with the level of mortgage defaults we now have.
Buzz up!
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3 Responses to “Do We Need Assumable FHA Mortgages?”
Patricia Paakkonen Says:
October 19th, 2009 at 4:34 pm
Apparently FHA loans are no longer freely assumable…you have to be a qualified buyer.
Bruce Says:
November 16th, 2009 at 8:25 pm
“With a qualified assumption you need the lender’s approval to take over the loan, approval which is rarely if ever given.”
THIS IS MERELY ACADEMIC DISCUSSION AND NOT LEGAL ADVICE: It appears that you may be a bit confused. You may want to review 24 CFR 203.512, 24 CFR 203.41(a)(3), and HUD Handbook 4330.1 REV-5, “Administration of Insured Home Mortgages,” Chapter 6 “Change of Mortgagors (Assumptions) or Servicers and Sale of Mortgages.”
There you will see that it is against the rules for a mortgagee to impose restrictions (including interest rate increases) on a conveyance of an FHA-insured property to a financially-qualified principal resident-buyer per FHA’s financial qualification guidelines.
“With a qualified assumption you need the lender’s approval to take over the loan, approval which is rarely if ever given.” —NOT—
Peter G. Miller Says:
November 17th, 2009 at 8:01 am
Do you have any evidence that we are seeing a large number of assumptions? If not, why not?
