FHA – Whether you are an owner deciding whether to sell or refinance, or a buyer in today’s real estate market, talk with a lender about “assumable” provisions of the mortgage.
While no one can see into the future, we can see into the past. I don’t think anyone will be surprised that we may be looking back on today, from some year in the future, at dramatically lower interest rates. Most are expecting interest rates to be 7% or more, a few years from now. Most are expecting home prices to stay down and flat for some years to come. That means the cost of selling will be hard to recoup, and finding a buyer for the home you are trying to sell will not improve greatly from where we are today.
IF the buyer of your home 3 or more years from now, can assume your lower interest rate mortgage of today, that will be a selling feature. It happened before in the last recession, and it will happen again. The buyer will still have to qualify. The buyer will have to come up with the difference between the sale price and the loan they are assuming from you that has a lower interest rate (so don’t go overboard with downpayment on an FHA loan).
To the best of my knowledge, most if not all, conventional loans are NOT assumable. Most, if not all, FHA and VA loans ARE assumable. I’m sure Rhonda will chime in here and give us the scoop on that.
This weekend I was speaking with a young man who may be eligible to refinance his home and stay in it, though he is worried about possibly losing his job and having to sell in the next couple of years. I told him to try converting to an FHA loan when he does his refinance, keep the LTV as low as possible, and make sure there is an assumable feature.
I am a real estate agent, and not a lender. All I know is that if he tries to sell two years from now and interest rates are 7%, and he has an assumable mortgage at 5.5% or below, that could be of great help in a future market with more sellers than buyers.
Speak with an attorney about the potential downside of a “purchase money loan” vs. a refinance, in the event of future default, before refinancing an original purchase mortgage. More on that in one of my other posts of the day.
Ardell, FHA loans (including FHA-Jumbo) are assumable–it’s really a great point you’re making with this post. Borrowers would still need to qualify with the lender.
Thanks Rhonda,
Besides a better interest rate, the cost of assuming a loan is often reduced as well. In the early 90s, people who had a lower rate that was assumable, were often not only the only ones able to sell their homes, but were often also getting higher prices for their homes.
People buying today should do everything they can to address any issues that will affect them when it is time to sell. Getting an assumable loan, even if it costs a little more today, may be the better way to get ahead of the curve.
Putting a lot of money down on an FHA is not a good idea, as the person assuming the loan in future years will have to come up with the same high downpayment, even in a flat market. That is an important point for both buyers and lenders to consider, when someone is getting a VA or FHA loan today, because of its assumable feature.
Great information Ardell!
I hadn’t thought about this, but it makes sense and I will share it with my agents.
Donna
Great information Ardell!
I hadn’t thought about this, but it makes sense and I will share it with my agents.
Donna
Hi Donna,
One of the benefits fo being older and “around the block a few times” 🙂
Sometimes “been there; done that” gives you a little more foresight that helps people get in front of a future problem, before it happens.
Ardell, if someone is considering allowing their FHA mortgage to be assumed, I highly recommend they investigate getting a SUBSTITION OF LIABILITY to protect themselves.
I understand the cost is reduced but may run around 1% of the loan amount. I’m not in “that end” of the biz… 😉
Ardell, if someone is considering allowing their FHA mortgage to be assumed, I highly recommend they investigate getting a SUBSTITION OF LIABILITY to protect themselves.
I understand the cost is reduced but may run around 1% of the loan amount. I’m not in “that end” of the biz… 😉
Ardell:
Buyers must qualify for a VA loan to assume one, that is, they must have VA eligibility.
Great point about keeping the down payment low, for assumability purposes!
And, so far as I know, conventional fixed rate loans are NOT assumable, (and it’s not likely that anyone would be eager to assume a conventional ARM, even if it were assumable).
I was reading a report/survey that ARMs now make up only 2.5% of originations. The same report showed that government loans were almost equal in percentage volume to conventional loans (42% and 46% respectively), which is a far cry compared to 3 years ago, when government loans accounted for less than 5% of total volume.
Rhonda and Roger,
The details of how someone assumes an FHA loan are not as important today, as that will more likely happen a few years out when and if interet rates go up from where they are now.. By then things could change as to the specifics of how someone assumes your mortgage.
If you get an FHA today at 5.3% and rates are at 6.5% to 7% two years from now, then we talk about the specifics of assuming someones FHA (or VA) mortgage. May make no sense until and unless there is a spread in rate.
The important thing is getting this option in place at time of purchase or refinance now, so you have this option come time to sell in the future.
Ardell, I do think that rates are more likely to go up than down over the next few years and those who will have FHA/VA mortgages at these attractive rates will really have an extra “bonus” when they decide to sell.
I included the suggestion that folks get a Substitution of Liability because I’m concerned a lot of people rely on blogs like RCG for information and they should really make sure they have their behinds covered if they’re allowing their mortgage to be assumed. 🙂
Rhonda,
In practice, it doesn’t always work that way. Sometimes a seller will forego the protections in exchange for a higher sale price, especially if they know the buyer well or if the buyer is a family member. But we don’t have to worry about those details now 🙂
Ardell, totally forgot about how many of these assumables we did in the last “flat” market c. 1990. It’s a great point to make. Also, I have some foggy memory of the seller getting back a prorated funding fee if their buyers elect to cash them out, paying off that FHA loan. Anything more concrete on that?
Re/Rhonda’s points, I thought that the qualified assumption did give the original borrow a release of all liability. It would be a huge issue if it did not.
Ardell, totally forgot about how many of these assumables we did in the last “flat” market c. 1990. It’s a great point to make. Also, I have some foggy memory of the seller getting back a prorated funding fee if their buyers elect to cash them out, paying off that FHA loan. Anything more concrete on that?
Re/Rhonda’s points, I thought that the qualified assumption did give the original borrow a release of all liability. It would be a huge issue if it did not.
Gordon,
What I remember most was how attractive these offers were and how it really helped some people sell their homes and be competitive as to terms vs. price. They got higher prices for their homes than they would have if the loan wasn’t assumable.
This post doesn’t cover all the details of how someone would assume it. Just points out that buyers today may be happier when they try to sell, if they get a loan that is assumable by a future buyer. The way things are changing every day, I doubt the details will stay a constant for the next 5 years.
I think the post “How do you assume someone else’s mortgage, and should they let you?” Is a post of the future written by a lender and not a real estate agent 🙂