FHA insurance, paid for by the borrower (mortgagor), protects the lending institution against loss if the property is seized for nonpayment and can´t be sold for enough to cover the debt and legal costs. Even though the lender would be reimbursed, the borrower is still personally responsible for any shortfall.Because the last owner is the one who had financial difficulty, the original borrower could be the one required to make up the loss. It is wise, therefore, to check the financial health of the buyer who proposes to take over one’s FHA loan along with the house.
The original borrower is always personally responsible unless a “formal assumption” process is used, under which the new borrower proves satisfactory credit and income to the lending institution.
Even with non formal assumption, most FHA mortgages place after December 1, 1986, require anyone assuming the loan to prove financial ability to the lender’s satisfaction. For many of those loans, the original borrower will be released from liability five years after an assumption.
This Tip was excerpted from:
Dear Edith... On Real Estate by Edith Lank, Longman Financial Services Publishing, 1990
ISBN # 0-7931-0007-0
