FHA mortgages continue to be an extremely attractive means for financing homes in the current economic and housing environment due to their low down payment requirements, liberal underwriting guidelines, affordable interest rates and government insurance. In fact, the majority of the mortgages funded in our office have been FHA loans. In addition to the fantastic benefits named above, a lesser-considered benefit that FHA loans have to offer is the fact that they are assumable.
What is an Assumable Loan?
Investopedia.com defines an assumable loan as follows:
“A type of financing arrangement in which the outstanding mortgage and its terms can be transfered from the current owner to a buyer. By assuming the previous owner’s remaining debt, the buyer can avoid having to obtain his or her own mortgage.”
The result of a home purchased through a loan assumption is that the person assuming the loan will simply begin to make the payments as they come due when the title is transferred.
FHA Mortgages Are Assumable.
All FHA loans are assumable when processed using HUD’s guidelines. However, mortgages closed on or after December 15, 1989 require credit qualification of those borrowers wishing to assume the mortgage. See FHA Handbook 4155.1 REV 5, Sections 4-1 and 4-4 and Handbook 4330.1 REV 5, Section 6-6.
What Is the Benefit of an Assumable Loan?
The main benefit of an assumable FHA loan is that the interest rate is transferable upon assumption of the loan. If you are financing your home today, this may not seem like a big deal to you. But if you plan to sell the house you are currently financing in a few years from now (or later), it could be. Consider the competitive advantage that you will have as a seller if your house is on the market with at 5.5% fixed assumable interest rate at a time when the market rates are at 9 or 10%. Because your house is much more affordable to a prospective buyer, it will have a higher likelihood of selling.
Will Interest Rates Go Up?
The benefit of having an assumable loan is based on the ability to transfer the rate to a new buyer when the market rates are higher. Obviously, for this scenario to transpire, market rates have to go up. Will this happen? Many economists predict that as the economy starts to recover we will experience inflation and rates will go up. This prediction appears reasonable when one considers the existing monetary policies that are in use to help stimulate the economy (e.g. quantitative easing and stimulus packages).
Therefore, if you are considering what type of financing to use to purchase or refinance your home, remember that aside from the current great low interest rates, low down payment requirement and liberal underwriting criteria, the fact that FHA loans are assumable is a significant benefit.
Leave a Reply