Assumable Mortgage Loans

With the recent rise in mortgage rates some buyers might be interested in an assumable mortgage loan. Here is a little bit of info regarding the FHA and VA assumption requirements/guidelines:

The FHA assumption process follows the same format as a simple assumption of a creditworthiness assumption, this is a process that would be reviewed and facilitated by the current servicer of the loan.

Two assumption programs exist for FHA mortgages:
• The Simple Assumption – for mortgage insured by the FHA before December 1, 1986
• Creditworthiness Assumption– for mortgage insured by the FHA after December 1, 1986
A simple assumption is the simpler method between the two. There is almost no legalities involved when assuming an FHA loan insured prior to December 1, 1986. Basically, you only need to inform the FHA of the buyer’s intent to assume the mortgage. No credit checks necessary.

Contrary to the leniency on FHA loans insured prior to December 1, 1986, assuming an FHA mortgage insured after the said date can be a bit more stringent. To qualify, a buyer must meet the standards set by the HUD or the Department of Housing and Urban Development. The buyer is still required to pass the qualifying requirements for a mortgage. In addition, the lender must give consent to the process by stamping his or her approval on the assumption.
The credit review shall be completed within 45 days after the lender receives all the necessary documents. The review may consist of the following requirements:
• credit review– a review of the borrower’s credit and if the current mortgage is serviced by a Direct Endorsement (DE) approved lender
• secondary financing– a secondary form of financing may be allowed, provided that the repayment terms of the loan is clearly defined and included in the underwriting analysis
• seller contributions– cash contributions from the seller for the assumption is not allowed, although they can contribute to some of the costs of closing without reducing said amount in the mortgage

With regard to VA assumptions, if a loan is transferred to another qualified VA loan beneficiary, their entitlement takes over provided a Substitution of Entitlement (SOE) is obtained. The Substitution of Entitlement also referred to as Statement of Veteran Assuming GI Loan, is a form (VA Form 26-8106) that the qualified veteran buyer signs permitting substitution of entitlement for that of the veteran-seller. Without this certification, the entitlement utilized to purchase the home will remain tied up there until the loan is fully repaid. A Substitution of Entitlement is normally possible after the borrower who had the original VA loan assumed can present a Release Of Liability form from the original VA loan.

The new buyer would have to meet all VA eligibility requirements:
• The existing loan must be current. If not, any past due amounts must be paid at or before closing.
• The buyer must qualify based on VA credit and income standards.
• The buyer must assume all mortgage obligations, including repayment to the VA if the loan goes into default.
• The original owner or new owner must pay a funding fee of 0.5 percent of the existing principal loan balance.
• A processing fee must be paid in advance, including a reasonable estimate for the cost of the credit report.

The current servicer will be able to advise if the loan is assumable and then if so, provide the required documentation needed in order to proceed.

Approval from the VA may be required as well, however, the servicer will be able to advise of such.

We hope this is helpful and if we can assist, please let us know.