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FHA Assumability

4/16/2011

2 Comments

 
When deciding between getting an FHA approved loan or a conventional loan there are many factors that go into this decision.  The primary ones in the past have been
  • Down payment.  The FHA loans only require 3.5% down vs conventional loans which typically require between 10% to 20% down depending on rate.  Also FHA allows for down payment gifted from a family member, a governmental agency, or a nonprofit organization.
  • Mortgage Insurance Premium.  FHA loans require a mortgage insurance and thus FHA borrowers are required to pay a mortgage insurance premium.  Many conventional loans do not require a mortgage insurance premium if a large enough down payment is made.
  • Credit Qualification Criteria.  It is easier to qualify for a FHA loan than a conventional loan.
  • Total Loan Amount Limits.  The loan limits for a FHA loan are typically less than those of a conventional loan.
One of the other advantages that has often been overlooked is that FHA loans are assumable and conventional loans are not.  In the future this is going to have a significant impact on property owners.  Everyone is expecting interest rates at some point to start increasing within the next year or so.  When this happens, owners who have FHA loans will have an advantage in selling their homes v. conventional loan holders as conventional loans typically are not assumable.  The new buyers from an FHA loan seller will be able to assume the loan at the lower interest rate reducing their payments.  This will greatly expand the buyer pool for sellers with FHA loans as more buyers will be able to afford their monthly payments.
2 Comments
jen krohn link
5/25/2011 06:32:09 pm

Hey Greg,

I'm a new agent in Ohio trying to sell my sister's home. She has an FHA loan. I also have a buyer who is looking to rent because "she's not in a position to buy right now". I know the main draw of assuming an FHA loan is for a lower interest rate. Does the buyer also have the luxury of not having to make a down payment when assuming a loan? What are the benefits to the buyer, seller and agent in this scenario? I'm having difficulty understanding. Thanks for any advice you could offer!

Reply
Greg link
5/26/2011 06:41:55 am

The current homeowner should contact the servicing bank to make sure of the exact procedure and costs. For loan originated after December 1986, the new buyer that wants to assume must be credit worthy. Below is a summary of the usual requirements based off of information I have received from one of the Lenders I have used in the past

*Buyers must credit-qualify to assume existing loan for remaining term.

*Buyer will obtain assumption package from current loan servicer.

*Loan fees are lower than a new-loan origination.

*Sellers will be released of liability.

*No appraisal required.

*Investors do not qualify for assumptions.

*Cash contributions from the seller to facilitate the assumption are not allowed.

*Seller may pay buyer’s closing costs and processing fees.

*The borrower may use secondary financing and borrowed funds.

The buyer will have to make the seller whole (down payment) unless the property is under water on value. The buyer could take out a second to payoff the seller.

I hope this helps.

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    Greg Bryan is a realtor and an attorney in San Francisco

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