FHA loan assumability - Posted by TomC (Md)

Real Estate Investing Real Estate Law
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Posted by Stacy (AZ) on March 21, 2001 at 14:11:49:

Here’s an excerpt from Bronchick’s due on sale article that pertains to this discussion:

"18 U.S.C. Sec. 1010 makes it a crime to make any false statement in regard to a loan insured by HUD. This law has been used to prosecute borrowers and their brokers who lie on their loan applications or “fudge” down payments for FHA loans. It has never been used to prosecute due-on-sale violators. In fact, the HUD-1 Settlement Statement (lines 203 and 503) that is used for virtually every loan closing has a blank which states, “loans taken subject to.” How could a HUD promulgated closing form contain such a blank if it were a crime to take property subject to an existing loan?

Stacy

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FHA loan assumability - Posted by TomC (Md)

Posted by TomC (Md) on March 19, 2001 at 17:03:41:

I posted last week about a condo deal that I was trying to work out. The seller was willing to sell for the loan balance, provided I took over the FHA-assumable loan. I liked the idea, since it keeps closing costs low.

Well, it looks like the assumption won’t happen. Investors cannot assume FHA loans originated after December 1989.

So the deal is that an assumption works well if you plan on occuplying the property, but not if you want to keep it as a rental.

Here is all the info from FHA’s site in case you are interested…it starts with some boring history stuff…

All FHA loans which were originated (application signed) prior to December 1, 1986, are freely assumable, meaning no credit check is required of the purchaser. The purchaser simply needs to pay the difference between the purchase price and the balance of the existing FHA loan. This difference could be paid in cash or the Seller holding a note. The Seller will remain liable for the life of the loan. (Optional Release of Liability)

All FHA loans originated between December 1, 1986, and appraisal issued by February 4, 1988,had restrictions of the assumability during the first 2 years of the loan. As these time periods have passed, these loans are also freely assumable. No credit check is required of the Buyer and the Seller remains liable for the life of the loan.

All FHA loans closed between February 5, 1988, to December 14, 1989, also had restrictions on the assumability of the loan during the first 2 years of the loan. Since these time periods have passed, these loans are freely assumable and the Seller will remain liable for the life of the loan. Investor assumptions must be paid down to 75% of the original LTV or 75% of the current appraisal LTV.

And it continues with bad news…

On loans closed on or after December 14, 1989, an investor can never assume. For others, credit approval is mandatory and the Seller is automatically released from liability.

The credit approval is pretty much a full-blown mortgage approval process minus an appraisal. If a HUD “as is” appraisal is obtained and it indicates the loan to value of the property is 75% or less, reduced documentation is required.

The assumption package is requested from the current holder of the FHA mortgage. The package is submitted along with the assumption fee and fee for the credit report. Secondary mortgages or other borrowed funds may be used by assuming Buyers provided terms are clearly spelled out and included in the underwriting analysis. A cash contribution from the Seller is not acceptable.

An assumption can be an excellent vehicle for a home purchase especially in a period of rising interest rates. The purchaser will take over the lower interest rate, the current PITI and the number of years remaining on the loan.

Anyways,
I thought this would be good info to share.
TomC

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Re: FHA loan assumability - Posted by JPiper

Posted by JPiper on March 19, 2001 at 17:26:52:

I believe that some of this information may be erroneous. For example:

  1. I have assumed various loans originated between 1987 and 1989…as an investor. I believe there is no restriction on this. In fact, I have assumed some in a corporation, some as a corporate trustee for a corporation. Further, each time I assumed the seller signed the same identical paperwork…informing them of their ongoing secondary liability for 5 years.

  2. I have not formally assumed an FHA loan originated after 1989. However, I believe that investors can assume these provided that the loan does not exceed 75% of FMV, as established by an appraisal.

One thing I would be cautious about…there is considerable misinformation around about FHA loans…some of it handed out by HUD themselves. There is a HUD guideline book on the internet…forgot the address at this point…where all this information can be found.
JPiper

4

All… - Posted by David Alexander

Posted by David Alexander on March 19, 2001 at 17:24:40:

FHA loans are assumable, they just qualifying assumable after the dates you mentioned, which you ahve already found out.

With that said why assume them… find motivated sellers and buy houses without going on the loan.

David Alexander

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Re: FHA loan assumability - Posted by TomC (Md)

Posted by TomC (Md) on March 19, 2001 at 18:48:27:

Hi Jim,

That info may be incorrect, even though I lifted it straight from a page at www.hud.gov that altavista found for me.

The loan I was considering assuming was originated in late 1993. The owner requested the assumption package from the lender, then mailed it directly to me.

The package was plain boilerplate, with nothing that appeared customized to this particular loan. It explicitly stated that the loan could only be assumed by an owner-occupant.

Anyways, the owner isn’t interested in “subject-to”, so… NEXT!

TomC

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Re: All… - Posted by TomC (Md)

Posted by TomC (Md) on March 19, 2001 at 18:55:43:

Hi David,

But not as an investor!

In order to assume the loan, I would have to fill out an affadavit form stating that I intended to purchase the property to occupy. This form was included in the assumption package.

According to the lender, If I don’t intend to occupy, I can’t assume. Even though my credit is strong, and I have the cash and income to qualify with room to spare!

Gotta love the gov’t…I’m a better credit risk than the seller…but if I won’t occupy - they won’t let me assume the loan.

TomC

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Re: FHA loan assumability - Posted by JPiper

Posted by JPiper on March 19, 2001 at 19:49:35:

I was able to find the FHA Handbook. It does state that investors cannot assume an FHA loan post 1989. Wild! At one time I had the internal underwriting criteria from CTX Mortgage, which talked about the 75% LTV thing for investors.

Like you said though…subject to is a whole lot easier. In fact, the lack of assumability gives the investor and seller a reason to go subject to.

JPiper

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Re: All… - Posted by Rob

Posted by Rob on March 20, 2001 at 08:55:39:

Yeah, The Gov’t sure know how to do business. Even if you offer more than the asking, because you are an investor. They will not sell it to you. The buyer could be struggling, or barely meet the requirement.
He has a shot at it. The investor has a small chance.

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Don’t try to do a Subject to on FHA… - Posted by Randy Jensen

Posted by Randy Jensen on March 19, 2001 at 19:38:40:

If you try to do a subject to on a FHA or VA loan originated in the 90’s or later you are commiting a FELONY. It is not worth the risk, either assume it or move on to another deal.

For what it is worth.

Randy

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Re: FHA Handbook url - Posted by Paul_MA

Posted by Paul_MA on March 19, 2001 at 21:35:22:

Were you able to locate the url?

Paul_MA

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Absolutely wrong - Posted by Bud Branstetter

Posted by Bud Branstetter on March 19, 2001 at 19:52:58:

It is not a felony. There is no due on sale jail. The only felony is if you take over a loan and collect payments but do not pay the lender on a federally insured loan.

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Re: Don’t try to do a Subject to on FHA… - Posted by JPiper

Posted by JPiper on March 19, 2001 at 19:50:50:

Who’s committing a felony, and where is this stated?

JPiper

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Re: FHA Handbook url - Posted by JPiper

Posted by JPiper on March 19, 2001 at 22:15:47:

Go to www.hud.gov. Click on handbooks/forms. Then click on HOC Reference Guide. You can also do a search from here on certain key terms. For example, assumeability is in Chap 4, which for some reason is not in the table of contents…but you’ll get there through a search.

JPiper

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absolutely right…jail time - Posted by Randy Jensen

Posted by Randy Jensen on March 19, 2001 at 21:22:21:

Violating a due on sale clause has nothing to do with it. You are breaking the lawby defruading the federal gov…FHA. Due on sale is the lenders safety net. This all came about because of all the equity skimming in the late 80’s.
I will find a source cite as soon as i can.

Randy

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Re: absolutely right…jail time - Posted by TheMadDog

Posted by TheMadDog on March 20, 2001 at 20:24:01:

Hi Randy,

I guess we’re all still waiting for your, ummm, source, that you quoted.

Please let us know when you’ve been able to find it. :slight_smile:

Thanks for sharing.

TheMadDog

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Re: absolutely right…jail time - Posted by eric-fl

Posted by eric-fl on March 20, 2001 at 08:14:20:

Randy, I think we are ALL looking forward to your “citing a source” to prove that buying subject to the loan is a felony. In my state, their is a provision for it right on the standard purchase and sale contract, used by the Florida Association of Realtors, and the Florida Bar. Perhaps you know something they don’t? Any source you can site, ANY. Be it a statute which clearly states what you have asserted, a case precedent that is “on point”, even a newspaper article showing how someone got jailed for buying subject to, then dutifully making the payments. Bear in mind, we all know, if you buy subject-to, and DON’T make the payments, that’s fraudelent, but that’s not our intention, of course. Looking forward to your response.

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Re: absolutely right…jail time - Posted by JPiper

Posted by JPiper on March 19, 2001 at 22:24:25:

Evidently the FHA Handbook saw fit to mention a “subject to” assumption and left out the bit about “fraud” and “jail time”. Here’s the quote from the Handbook:

“Any person assuming an insured mortgage subject to the 1989 Act must be found creditworthy by HUD or a DE lender. This policy applies to borrowers who take title to the property subject to the mortgage without assuming personal liability for the debt and to those borrowers who assume and agree to pay the mortgage. The creditworthiness review requirement extends for the life of the mortgage. Assumptions without credit approval are grounds for acceleration of the mortgage, if permitted by applicable state law and subject to HUD approval, unless the seller retains an ownership interest in the property or the transfer is by devise or descent.”

Wouldn’t you have thought if this was “fraud” or if “jail time” was involved they would have mentioned something beyond the possible acceleration of the loan as a penalty???

I’ll look forward to ANY example you can find of a “fraud” conviction for a “subject to” transaction or any “jail time”. My bet is you can’t find even one example.

JPiper

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Re: absolutely right…jail time - Posted by JPiper

Posted by JPiper on March 20, 2001 at 11:08:57:

Just thought I’d pick a little with one part of this answer. Buying subject to and not making the payments is not fraudulent. Buying subject to, rent it out, and then not making the payments would be fraud in some states, to include Florida.

JPiper

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clarification…and adding info - Posted by Randy Jensen

Posted by Randy Jensen on March 20, 2001 at 20:48:17:

I am a realtor, and our legal council is who said that the FHA wrap for loans after 1989 is illegal. But this was also said during the discussion about getting a new loan as an owner occupant but never intending to occupy which is completely illegal. He may have misspoke or I may have misheard about the wrap part, but in colorado NO AGENT is allowed to be the PROCURING cause in a FHA wrap. I am still working on the clarification but I was very busy today as I was able to get 2 preforeclosure clients to deed me their houses, so needles to say my time was spent mostly on that and not the research. But I still have the implication that the FHA wrap/subject to is illegal, and I will definately keep up the search.

Randy

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Re: clarification…and adding info - Posted by JPiper

Posted by JPiper on March 20, 2001 at 22:27:14:

Randy:

It sounds like you really aren?t sure of your ground here. If nothing else, your accuracy leaves much to be desired.

For example, in your original post you said ?If you try to do a subject to on a FHA or VA loan originated in the 90’s or later you are commiting a FELONY.? In this latest post you?re talking about ?FHA wraps?. There is a difference in the instrument. Then you say your legal counsel said the ?wrap? was ?illegal??..later you use the term ?completely illegal? when referring to the issue of misrepresenting occupancy on a loan application. Is there really a difference between the concepts of ?illegal? and ?completely illegal?? And by the way, misrepresentation of occupancy IS loan fraud.

Here?s my guess Randy: Your ?legal counsel? has misspoke, or perhaps you misheard. Lots of people read the due on sale clause for example and decide that transferring a property despite this clause is ?illegal?. Not true of course. Transferring a property in a subject to transaction or a wrap would simply trigger the lenders right to accelerate their loan. But this is a far cry from ?illegal? or a ?felony?.

It might interest you to know that the purchase of a property encumbered with a VA loan via a land contract is permitted under the VA guidelines?.a so-called ?wrap? as you say. Not true though of FHA.

Further, I would even question your statement regarding ?in colorado NO AGENT is allowed to be the PROCURING cause in a FHA wrap.? I doubt the truth of this either. Perhaps you would cite the Colorado law prohibiting this while you?re finding those other ?cites? as well. Rather, if there?s any truth at all to this one, my guess is that it may be a company policy of your real estate firm. Correct me though if I?m wrong?just do it with specific FACTS rather than your OPINION.

I suppose that?s the most serious issue here. If you have been misinformed that?s understandable. However, to SPEAK information that may not be reliable is a problem. Kind of like yelling FIRE in a movie theatre.

JPiper