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The Power of Assumability


One of the rarely touted advantages of people taking FHA mortgages today is the fact that they are assumable. What that means is, when the FHA homebuyer of today is looking to sell his home, a qualified purchaser can “take over” their loan.

Most people believe that interest rates will return to a “normal” range (between 6.5% and 7%) in a couple of years. When you assume a mortgage, the terms remain the same. This means that a buyer five years from now can enjoy a 4 – 4.5% mortgage by assumption rather than the 6.5% – 7% mortgage they would get without it. Since most people buy homes based on how the monthly payment fits into their personal monthly budget, this is extremely impactful.

As an example, a $300,000 loan at 4% today carries with it a $1,432.25 principal and interest payment on a 30 year fixed mortgage. If offered for sale in five years, the purchaser could assume the $271,858.56 balance with the same $1,432.25 payment and remaining term of 25 years. The total payments over the 25 years would be $429,675.

Compare that to a new $272,000 loan at 6.5% for 25 years, which would carry a monthly payment of $1,836.56 (over $400 more a month than the assumption and more than $120,000 more over the 25 year term).

At 6.5% for 25 years, to wind up with the same payment as the assumed mortgage, our borrowers would only be getting $212,000…$60,000 LESS!

The point here is that, when rates go up, homes with assumable mortgages will have more value and will sell at higher prices because they are more affordable. As an additional bonus, the closing costs on assumable mortgages are significantly less (especially here in New York where NYS Mortgage Tax is such a large component of closing costs).

The borrowers must be credit-worthy of course (have good credit, qualifying income, and necessary assets to close), but they would have to be credit-worthy to get a new mortgage too!

Besides the multiple other reasons to obtain an FHA mortgage (low down payment requirements, extended income ratios, lower credit scores, and easier sourcing of funds), there is another perk. In the future, there is a good chance that you may be able to sell your home for more money because of the FHA loan’s assumability.


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9 replies
  1. jonbenya
    jonbenya says:

    The example only applies if values remain the same.  If values drop, the loan is underwater, and the seller has to bring money to pay down principle.  If values rise, the home is worth more, and the buyer needs to get a second or pay a big chunk of change to cover the difference.

    Reply
    • Dean Hartman
      Dean Hartman says:

      not true….there is no appraisal on an assumption.  Your underwatrer scenario is incorrect.Realize the lender is in the same position whether an assumption is approved or not (relative to equity).

      If there is appreciation, it is true that a buyer will need more cash, but depending how much cash, when you weigh the lack of closing costs and the monthly savings on the payment, it is likely going to make sense.

      Reply
  2. Dean Hartman
    Dean Hartman says:

    if the owner obtains a Release of Liability (which they will if they ask for it because the lender is approving the assumption), they will not get dinged (or the benefit of a good payment history is that was the case),

    Reply
    • Penny
      Penny says:

      Hi Dean,
      Wondering if FHA will let my husband and I assume our already home we have lived in now for 6 years that he and his mother are currently only ones on the note and deed, since I have paid the mortgage and will continue to pay it by myself? I had a bankruptcy discharged exactly 6 years ago from a prior divorce, but the bankruptcy was done in December 2007. My credit is also around 700 now and small bills are always on time. Any thoughts?
      Thanks Pen

      Reply
  3. Chad Beldon
    Chad Beldon says:

    Great article! As the federal reserve stops or reduces quantitative easing and rates increase over the coming months and years the assumability factor of FHA loans will become a prime benefit to anyone that plans on selling their home someday.

    Reply

Trackbacks & Pingbacks

  1. […] Written by: Dean Hartman on January 12, 2012 on the KCM Blog […]

  2. […] Article Source Filed Under: Uncategorized Tagged With: FHA Loans, Johnston Iowa, Real Estate, realtor […]

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