Assuming FHA 203(k) Loans
Today, few mortgage loans are assumable – VA and FHA loans are the primary exceptions. An assumable loan is one that another borrower can “step into,” meaning that they do not necessarily have to go through the entire process of obtaining a new mortgage. However, the situation is not really all that simple, and while an assumable mortgage might sound like a great thing, it may not be all it is touted as.
At the time of this writing, all FHA loans are able to be assumed, including 203(k) loans. However, given the list of pros and cons we just covered, it may not be in either the buyer’s or the seller’s best interest for the loan to be assumed. There is also the fact that 203(k) loans are larger than other FHA loans, which means the buyer will be paying more money for a home that has improvements that may or may not benefit or be of interest to them.
The primary reason this arrangement would be beneficial at all is if the original owner had a very low interest rate, and the national interest rate had significantly increased since that time. Otherwise, it may be a better choice for a buyer to obtain his or her own FHA loan, particularly if the home requires renovations.
Pros and Cons of Assumable Loans
While an assumable loan likely sounds like a beneficial thing, it is important to realize there are both pros and cons to this situation. We’ll discuss both below.
Pros of Assumable Loans
The new buyer can essentially “step into” the existing loan.
The buyer can take advantage of owners existing interest rate, which is appealing in situations where the market may have changed since the loan was originated.
Loans originating prior to December 14, 1989, are freely assumable, with few restrictions that might impede the sale of a property.
Owner financing may be available to help cover the balance of the difference between the sale price and the remaining total on the mortgage.
Cons of Assumable Loans
Those who will own/occupy the property must pay the balance down to 85% LTV.
Investors (allowable only on applicable properties) must pay the balance down to 75% LTV. Note that investors are barred from assuming any FHA loan that originated on or after December 15, 1989.
Loans originating on or after December 15, 1989, are not freely assumable, and buyers are required to demonstrate creditworthiness. Anyone seeking to assume this loan must go through the entire approval process just like a new borrower would.
The buyer may have to obtain a loan of their own in order to pay the balance between the remaining mortgage amount and the price of the home on the market. Otherwise, they will need to use cash for this.
All assumptions must be done with the lender’s approval. If not, and if the seller does not maintain an ownership interest in the property, then the entire amount of the loan becomes due immediately.
The original owner may not be completely removed from the loan, meaning that even if the loan is assumed and the original owner moves out, if the buyer defaults, the original owner could be on the hook for payments to the lender. Foreclosure will also show up on both the original owner and the buyer’s credit report. Only a novation can alleviate this risk, although the lender on any FHA loan originated on or after December 15, 1989, is required to release the original buyer from all responsibility before assumption can take place.