Assuming an FHA Loan - PMI Carried Over/Able to be Removed?

Question

Hello All,

I may be selling a triplex in a few months that has an FHA loan attached to it.  Note this FHA loan was originated before the June 2013 change that makes PMI last the life of the loan.  Instead, since it was originated before June 2013, the loan has the option of removing PMI after 20% is paid down AND 5 years has passed from loan origination date.

My question is, if a potential buyer of my triplex would like to 'assume' the FHA Loan that still has the PMI (i.e. being sold before the 5 years is up), does:

a.) The buyer still have to pay PMI if the appraised value during sale exceeds the loan amount such that the loan amount is <= 80% equity

b.) If the assumed loan has PMI, is the 'option of removing PMI' ability grandfathered into the loan?

c.) Does the start date of the PMI counter (5 year counter) still remain the loan origination date or is it now the start date of the buyer's assumption of the FHA loan?

I can't seem to find these answers on the internet.  Someone out there must have bumped into this question at some point!  Thanks!

Joseph Zanazan · Answer

The FHA has made six changes to its mortgage insurance premium policy in the last 6 years. Beginning in June 2013 , the FHA moved away from its LTV-based system. If I'm understanding correctly, seems like this loan was originated prior to the cutoff date so you still have the ability to drop the MIP. With these types of assumptions, an appraisal typically isn't required. That might make the deal easier  to  close and save your buyer the appraisal fee. The buyer might choose to obtain an unofficial appraisal   independently of the lender to mitigate the risk of overpaying for the   property. Remember that a  loan assumption means a credit check is completed the same way any FHA loan application would. Loan assumptions can't offer more lenient  credit check policies or more stringent ones. If the seller's loan was originated prior to 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 occupy the residence. This eliminates non owner occupied investors.

To answer your questions directly:

a.) The buyer still have to pay PMI if the appraised value during  sale exceeds the loan amount such that the loan amount is <= 80%  equity

At that point, it wouldnt be a PMI, it would be MIP. The new appraisal would be unofficial. The regular LTV based FHA parameters would apply to the current note. The original terms of that mortgage would apply and you would be able to release the premium once the loan amount reaches the 78% threshold of the last known value of the home, not the new appraised value.

b.) If the assumed loan has PMI, is the 'option of removing PMI' ability grandfathered into the loan?

Yes it is. The original terms of that loan will remain because it was originated prior to the cutoff date.

c.) Does the start date of the PMI counter (5 year counter) still remain  the loan origination date or is it now the start date of the buyer's  assumption of the FHA loan?

The original terms of that loan will remain because it was originated prior to the cutoff date.

I'm licensed in the wonderful state of PA Brandon. I would be more than happy to assist you with any additional mortgage related topics. If you need help with financing or would like to simply run some numbers, i would be more than happy to go through them with you.

Tyler Mills · Answer

As for the ability to remove the PMI, it carries along with the assumption, as do ALL other terms of the loan.  They are taking over your loan as it is, no modifications, just a change in who the loan is paid by and the name on it.  As a quick correction, the PMI can be dropped at 78% LTV after 5 years, not 80% (20% paid down).

The PMI counter is based on the origination date of the loan as well, this does not reset one the loan is assumed.

Just as a quick clarification on this, the FHA hasn't moved away from an LTV based system post June 2013, they have just changed the length of PMI to permanent if you are putting down less than 10%, and if you are putting more than 10% you can have the PMI removed after 11 years.  LTV still plays a role in the origination determining whether PMI is permanent or for 11 years, just not specifically on the cancellation.

If you are looking for more information on assumable mortgages I would recommend checking out Zumption, which deals specifically with assumable mortgages, both FHA and VA.  There is also contact information on site and a bunch of assumption resources

Tyler Mills · Answer

With FHA qualification you do not need to be a first-time home buyer, as long as the property you are looking to get the loan for, or to assume, is going to be your primary residence and the buyer can qualify.

As for the down payment portion, there are several options including secondary financing or a HELOC, as well as a gift from a family member up to a certain amount.  Be aware though that secondary financing could affect the qualification process for the FHA assumption.  If you have any other questions feel free to ask!

Brandon Cao · Answer

After you posted about the Mortgage Assumption Value, I looked that up.  Very interesting.  That can definitely help maximize the value of the home.

So I guess I have a couple follow-up questions.  I looked online on FHA.com (an unofficial FHA website) and they said to qualify for the FHA loan for loans made after December 1, 1986, "FHA approval and borrower credit verification are required. The 'new' FHA rules governing loan assumption requires the borrower to qualify much in the same way he or she would qualify for any other FHA home loan."  Does that mean the buyer HAS to be a first-home buyer?  Or can a person who already owned a primary residence in the past assume the FHA loan.

Secondly, is it possible for a person to take out a personal loan to get the downpayment number and then assume the mortgage?  My thinking is that this is possible as long as the borrower can qualify under DTI and other lender metrics.  Thanks for your input so far guys, this is very helpful!

Joseph Zanazan · Answer

Thank you for the clarification Tyler. Yes, that is correct. What i meant was that the new parameters that have been set forth starting June 2013 on the highly leveraged FHA loans will disregard your ratios moving forward since the mortgage insurance will be mandatory for the life of the loan.

Tyler Mills · Answer

Brandon,

Another thing to consider when selling your property is to consider the added value (Mortgage Assumption Value) the property would have, as well as the life of loan savings a buyer would get because of the lower rate.  With a low enough rate, and the spike over the past few days a buyer could potential save thousands over the life of the loan because of the lower rate.  This is a very important marketing tool when trying to sell the property! Feel free to message me and I would be more than happy to talk to you about the mortgage and the numbers that a buyer could potentially save etc.

Brandon Cao · Answer

Thank you so much @Joseph Zanazan , your insight into the FHA loan is greatly appreciated.  I'm very glad that the FHA loan maintains its integrity when transferring among individuals.  Assumptions will definitely sweeten the pot for a buyer-seller transaction particularly when I locked in such a favorable interest rate.  Thanks!

@Tyler Mills Thanks for the correction on the %LTV!  That 2% does make a huge difference, probably about a 12 month difference in equity for my loan if paying down principal at the normal rate.

Assuming an FHA Loan - PMI Carried Over/Able to be Removed?

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