The Basics

• Government-backed loans have minimal down payment requirements and flexible underwriting standards compared with conventional loans. Neither the FHA nor the VA make loans directly to borrowers. Approved lenders originate and service the mortgage, while the government insures it, paying claims to the lenders in the event of borrower default.
  
  By definition, a loan assumption is a transaction in which the buyer assumes responsibility for the original loan, although the seller may still remain liable for repayment of the debt.
  
  

FHA Assumption

• FHA-insured loans are subject to two types of assumption processes: simple or creditworthiness. Mortgages originated prior to Dec. 1, 1986 require the buyer undergo the simple assumption process, while those acquiring a loan originated on or after that date must undergo a creditworthiness check. After undergoing a creditworthiness review, the assuming borrower must occupy the home as his principal residence for at least 12 months if the loan was originated prior to Dec. 14, 1989, and for the life of the loan if originated after this date. In general, investors (non-occupant borrowers) may not assume FHA loans, although loans originated within a short window of time between 1986 and 1989 may be acquired by investors. In addition, the loan-to-value on a home may not exceed 75 percent when assumed by an investor.
  
  

VA Assumption

• Any buyer can assume a VA-guaranteed loan originated prior to March 1, 1988 without VA or bank approval. Buyers who assume VA loans must be veterans with full VA entitlement. The seller who received the loan remains liable for the debt. Entitlement determines military mortgage eligibility for veterans qualified to receive VA benefits, according to Direct VA Loans. If the buyer intends to occupy the home as her primary residence and has sufficient entitlement, they may release the seller of the liability. Mortgages originated after this date require bank approval of the loan assumption. In such cases, the process of credit qualifying relieves the seller of responsibility for the loan.
  
  

Considerations

• If a person who assumes the loan fails to qualify or skips the credit-qualifying process altogether but starts making payments on the loan and is added to the property's title in an unauthorized assumption, the lender may require the buyer to submit to a credit review after the fact. If he does not qualify, then FHA may accelerate the mortgage, calling the payment due and payable, even if the mortgage payment is current. When a buyer assumes a loan without credit qualifying, the seller remains liable for the debt in the event the person who assumes the mortgage defaults. Therefore, a release of liability is recommended.