A Federal Housing Administration loan has its perks, such as a low down payment requirement, flexible qualifying guidelines and competitive interest rates. Selling a home subject to an FHA-insured loan is much the same as selling a home financed with a conventional, or non government-backed loan. However, if your FHA loan has features such as an assumption clause or an escrow impound account, you may be in for unique provisions not otherwise available to home sellers.
Plan to Pay Off the FHA Loan
Most FHA loans require that you pay off the outstanding loan balance upon selling, along with any lender administrative fees. This provision is known as a due-on-sale clause. An FHA lender may exercise its rights under a due-on-sale clause at its discretion. It prevents a homeowner from passing on the ownership rights of an FHA-financed home to a third party without the lender's permission.
To pay off the FHA loan upon selling your home:
Step 1: Contact Your FHA Lender
Call the lender or loan servicing company that bills and collects your monthly payments. You can find the phone number on your most recent mortgage statement. You must supply your mortgage number.
Step 2: Request A Payoff Statement
Ask the representative for an itemized statement of fees you must pay to close the account -- known as a payoff statement. Provide an estimated sale date upon which the lender can base its fees, such as prepaid mortgage interest.
Step 3: Remit Payment to the Lender
Send the lender or loan servicer payment of the outstanding balance when the sale closes. You must meet the expiration date provided on the lender's payoff statement and the amount you send should equal or exceed the balance on the payoff statement. Request an updated payoff statement if you close after the statement expires, in order to obtain the new outstanding balance.
Selling Via the Mortgage Assumption Process
Some FHA loans allow a buyer to assume an existing FHA loan on a home. Although rare, a mortgage assumption allows a buyer to take over your mortgage under the same interest rate, mortgage balance and repayment terms. It can benefit a buyer by allowing her to obtain a below-market interest rate and pay fewer closing fees than she would in a regular home sale.
FHA loans older than December 1, 1986 don't require a buyer to qualify for the assumption. However, FHA loans made on or after that date require the buyer to pass an income and credit analysis by the lender. These processes are known as simple assumption and creditworthiness assumption, respectively.
To sell your home via the assumption process:
Step 1: Request An Assumption Package
Call your lender and let the representative know that you have a buyer willing to assume your FHA loan. The lender will confirm whether the transaction qualifies for the simple or creditworthiness assumption process.
Step 2: Pass the Package Onto the Buyer
Provide the buyer with the lender's assumption paperwork and checklist. The buyer must submit all items to the lender for review and approval.
Step 3: Coordinate Closing With the Lender
Sign all of your lender's required documents for the assumption and request a release of liability. A release relieves you from further financial responsibility for the FHA loan. The lender's closing department typically coordinates this portion of the assumption process.
Not all assumptions result in a release of liability to the seller. Talk to the lender and an attorney if you're unsure about your rights and obligations under an FHA loan assumption before you proceed with a loan assumption.