If mortgage terms on new loans are not as attractive as they were a few months ago, there is another option for sellers with mortgages insured by the Federal Housing Administration or the Department of Veterans Affairs.
The two government agencies offer a little-known option known as assumability. The feature allows the buyer of a home financed with an existing F.H.A. or V.A. loan to assume the seller’s loan under the same terms, rather than take out a new mortgage, as well as looking into va loan closing costs, to make the decision easier when it comes to purchasing a house.
As interest rates rise, homes for sale with an assumable, lower-rate mortgage may have much broader appeal for certain buyers.
The New York Times reports on this FHA/VA feature.
“You could now have a seller saying, ‘I have a great house to sell you and a great mortgage to go with it, which is better than my neighbor, who only has a great house,’ ” Marc Israel, an executive vice president of Kensington Vanguard National Land Services and a real estate lawyer, told the Times. “It’s a very clever idea.”
The benefits for the buyer assuming the loan goes beyond a lower interest rate. Assuming a loan can be cheaper than applying for a new one. There are fewer settlement fees and an appraisal is not required — however, a buyer may want to obtain one anyway.
F.H.A. loans do require that the borrower pay for mortgage insurance over the life of the loan. But when assuming a loan, borrowers do not have to pay the upfront mortgage insurance premium required on a new loan.
In some case, when the original mortgage holder has paid on a loan for years, the buyer assuming the debt will start at a point deeper into the amortization schedule than on a new loan. That means more of the monthly payment will go toward principal.
The Times gives this example of a transaction involving assumability: The seller’s loan balance is $150,000, and the sale price for the property is $200,000. The borrower assuming the loan must come up with the $50,000 difference, either in cash or through some type of subordinate financing.
Borrowers seeking to assume a loan must also prove their creditworthiness as they would for any F.H.A. or V.A. loan.