Assumable FHA Loans: The Invisible Advantage
When most people shop for mortgages, they are not thinking of the future, when they will sell their property. But if you’re considering FHA financing, you should. Assumable FHA mortgages can give you a competitive advantage when you sell, and that can put more money in your pocket.
How Much Is Assumability Worth?
An assumable FHA mortgage may have no value to home sellers when mortgage rates are on their way down. However, once rates head back up, assumability can give sellers a considerable advantage over their competition.
When the current market rate for mortgages is six percent, a home that comes with a four percent assumable mortgage is significantly more valuable than one without such financing.
Supposed that you refinance your home today with a four percent FHA mortgage at $331,685. And in five years, when you decide to sell your home, suppose you owe $300,000.
In five years rates have increased from four percent to six percent. A buyer evaluating your home and your neighbor’s (both priced at $360,000) might run the numbers before making an offer.
Buying your neighbor’s home:
- 20 percent down payment: $60,000
- Three percent closing costs: $9,000
- Monthly payment at six percent rate: $1,798.65
- Total paid over life of loan: $716,515.
Buying your home with its assumable loan:
- Down payment to you: $60,000
- 1.5 percent closing costs: $4,500
- Monthly payment at four percent rate: $1,583.51
- Total paid over life of loan: $539,554.
This means you may be able to ask a higher price for your home, sell it faster, or both.
How Does Your Buyer Assume Your FHA Mortgage?
In the past, FHA mortgages could be assumed without qualifying. But for loans originated on or after December 1, 1986, the new buyer must qualify according to FHA underwriting standards. In fact, the FHA states that, “Assumptions without credit approval are grounds for acceleration of the mortgage,” which means the buyer can lose the property to foreclosure.
The assumption process is relatively simple. Your buyer doesn’t have to pay for an appraisal. Processing is less time-consuming and costly than for new originations. Fees for processing assumptions cannot exceed $900.
Transfer From You To Them
To complete an assumption that won’t follow you to your grave, follow all FHA procedures. To release you from your loan, your lender completes a form HUD-92210, Request for Credit Approval of Substitute Mortgagor, or a similar proprietary form.
Your lender also completes form HUD-92210.1, Approval of Purchaser and Release of Seller, or a similar proprietary form, which constitutes a formal release of liability.
Only your lender can execute this release of liability. It’s critical because it covers you if your buyer subsequently defaults on your old loan. The lender must release all parties from liability once it approves the assuming borrower.
The value of your FHA loan’s assumability depends not only on future mortgage rates, but also on the rate that you get today. So the better your rate today, the more your mortgage assumability is worth tomorrow.
What Are Today’s Mortgage Rates?
Shopping for your FHA mortgage online is a free and easy way to compare a lot of interest rate quotes and be confident that you get a great deal. It can pay off when you buy, and also when you sell.