FHA-insured loans are assumable because they do not have a "due on sale" clause. The buyer can assume the loan and transfer the mortgage liability from the seller to himself. A big reason for assuming FHA loans is to take advantage of loans that originated with low interest rates. Assumable FHA loans are generally quicker to complete than conventional loans, because a property appraisal is not required. FHA assumable loans still typically require the buyer to undergo a creditworthiness review, which requires a credit check and income qualification.
Request a copy of the seller's loan papers and read them over. If the seller's loan was originated before Dec. 1, 1986, you can assume the loan using the "simple assumption" process, which means you don't have to go through a qualification process. If the loan was originated after that date, you need to qualify to assume the loan. Loans originated after Dec. 14, 1989, can be assumed only by private buyers who intend to live in the home, not investors. Read the terms of the loan, because the terms will stay the same when you assume the loan.
Bargain with the seller on the mortgage buyout. A mortgage buyout is the sum of money you pay the seller in order to assume the loan. The seller will want to recoup some or all of the equity he has in the home. How much bargaining room you have is dependent on how desperate the seller is to sell and the current value of the home. Keep in mind that the mortgage buyout is not financeable through the FHA loan. You will either need to come up with the cash or get a separate bank loan. Another option is to work out a deal for the seller to carry the loan for the buyout amount, meaning the seller would privately finance the buyout loan and you would make payments directly to the seller.
Evaluate your credit to see if you qualify under the FHA credit guidelines. If you have filed bankruptcy in the past, it should be at least two years from the discharge date, and you need two years of positive credit from the date of discharge. Order a copy of your credit report and go over it carefully. Dispute any inaccuracies with the credit bureaus to get them removed. The higher your credit score, the more likely you are to qualify to assume the loan.
Contact the lender to find out whether the seller is delinquent on the mortgage. Any past-due amount owed on the loan is transferred to you, the buyer. You'll either need to pay the seller's delinquent amount at the time of the assumption or apply for a loan modification.
Ask the lender about the down payment requirements and closing costs required for assuming the loan. Typically, a down payment of 3.5 percent of the part of the loan you are assuming and a $500 closing fee are required.
Apply with the lender to assume the loan. The application process usually involves a credit check, employment history verification and income verification. Also apply for a loan modification if the seller is behind on the mortgage payments and you don't have the cash to get the loan caught up.
Pay the down payment, closing fees and mortgage buyout and sign the loan assumption documentation.
Items you will need
- Copy of the seller's loan contract
- Credit report
- Jupiterimages/Comstock/Getty Images