Assumable Mortgages: FHA, VA and USDA Rules

Which loans can be assumed

Many mortgages contain a due-on-sale clause. Federal law (12 U.S.C. 1701j-3) bars lenders from enforcing it in some transfers on homes with fewer than five units. Examples include “a transfer to a relative resulting from the death of a borrower” and a transfer where “the spouse or children of the borrower become an owner of the property.” A transfer after a divorce decree is also listed.

FHA assumptions

HUD defines an assumption as “the transfer of an existing mortgage obligation from an existing Borrower to the assuming Borrower.”

Occupancy. If the original FHA loan closed on or after December 15, 1989, the buyer “must intend to occupy the Property as a Principal Residence or HUD-approved Secondary Residence.” Investment buyers can assume only older loans, with a maximum LTV of 75 percent. For a HUD-approved secondary residence, the maximum LTV is 85 percent.

Underwriting. “The TOTAL Mortgage Scorecard must not be used for assumptions.” A Direct Endorsement underwriter must review the file manually. There is an exception for transfers by inheritance or certain divorces, if the buyer has made the payments “for a minimum of six months.”

No down payment required. “The assuming Borrower is not required to make a cash investment in the Property.”

Fees. The lender may charge a processing fee “not to exceed a maximum of $1,800.” The lender must notify HUD within 15 Days of a change of borrower.

Release of liability. Notifying HUD alone “does not formally release the original Borrower from personal liability.” Release comes through form HUD-92210.1, Approval of Purchaser and Release of Seller.

For the program itself, see FHA loans.

VA assumptions and entitlement

VA loans carry a notice that “This loan is not assumable without the approval of the Department of Veterans Affairs or its authorized agent.” This rule covers loans with commitments made on or after March 1, 1988.

Release of liability. Under 38 U.S.C. 3714, the seller is relieved of liability if they notify the holder in writing before the sale and the assumption is approved. The buyer must be “obligated by contract to purchase such property and to assume full liability.” The buyer must also qualify “from a credit standpoint.” The buyer does not need to be a veteran.

Timeline. The holder must review the buyer’s creditworthiness and advise the seller “no later than 45 days” after receiving a complete application package. A denial can be appealed to VA “within 30 days.”

Fees. VA lists a funding fee of 0.5% for loan assumptions. The regulation sets it at “one-half of one percent of the loan balance,” paid by the person assuming the loan. The holder may also charge a processing fee “not to exceed the lesser of $300 and the actual cost of any credit report required,” or a lower state maximum.

Entitlement. VA lets a veteran restore used entitlement when “A qualified Veteran-transferee agrees to assume your loan and substitute their entitlement for the same amount of entitlement you used originally.” If the buyer is not a veteran who substitutes entitlement, the seller’s restoration must come from one of VA’s other routes, such as paying the loan in full. See VA loans.

USDA guaranteed loan assumptions

The lender “must obtain Agency approval before consenting to a transfer with an assumption.” Rural Development may approve it if the buyer:

• assumes “the entire outstanding debt”;
• meets USDA eligibility rules;
• buys a property that meets USDA site and dwelling standards.

Any new rate “must not exceed the interest rate on the initial loan.” “A new guarantee fee, calculated based on the remaining principal balance, must be paid.” Unlike FHA and VA, the USDA rule states that “the transferor must remain personally liable.”

Some family transfers do not trigger the due-on-sale clause, such as a transfer “to a spouse or children not resulting from the death of the borrower.” See USDA loans.

Costs and points to check

The buyer must pay the seller’s equity, which is the gap between the price and the loan balance, in cash or with other financing. USDA allows a supplemental guaranteed loan in some cases. Closing costs still apply; see closing costs explained. To compare the assumed rate with a new loan, see mortgage rates explained.