FHA and VA Assumable Loans Offer an Exit Strategy For Today’s Buyers

by Brian Brady

Commercial Real Estate Finance Expert
Structured Debt and Equity
Licensed Real Estate Broker in AL, CA, and FL

Author website

How can an FHA mortgage or VA home loan sell a home faster?   When mortgage rates are 10% and the 5% government loan is assumable.

I’ve taken a few pokes at the contributors on Active Rain; John MacArthur isn’t one of them.  John is a Branch Manager with Long and Foster, in Olney, MD.  John points out that agents and originators are failing to highlight one of the best features of government loans:

You see, no one is focusing on one of the sweetest features of an FHA loan. Oh, they talk about the modest down payment and ease of underwriting. They talk about a certain comfort level that the loan will close. We don’t hear many folks mentioning the biggest asset about FHA loans.

They are assumable!

Stop for a minute and think about 3 years or 5 years or 10 years from now. What do you think mortgage rates might be in 2012 or 2014 or 2019? Do you really believe that in the face of increased government spending, increased inflation, increased devaluation of the dollar that rates will hold around 5%?

This is really good advice.  Professional agents can distinguish themselves from the also-rans through an understanding of mortgage financing.  Nervous first-time home buyers will appreciate that an agent is thinking about an exit strategy for them.  John does it here:

Oh, and why might the lad on the left sell sooner? His 5% mortgage rate is assumable. Now, the new buyer will have to get a “wrap around” mortage for the difference between what is still owned on the FHA loan and the sales price and yes, that loan will carry the going rate at that time. The seller on the left will have to try to move his home at time when money surely will cost a bit more. It doesn’t take an MIT grad to discern that 5% on the bulk of a loan is much more attractive and affordable than the 8%, 9% or 10% or more that will be the rate in five years.

I added a scenario, with hard numbers, on Mortgage Rates Report.

Here are a few risks with this strategy (for disclosure purposes):

• The original borrower (seller) is “on the hook” for the first five years of the loan;  if the new borrower (buyer) makes payments late, both borrowers get their credit dinged.
• FHA loans carry mortgage insurance premium; that translates to about .5% annually.  Still, a 5% FHA loan, that feels like 5.5%, will be attractive in a 9.625% mortgage rate environment.
• Allowing a veteran to assume a VA loan ties up the selling veteran’s eligibility for a new VA loan.

Nothing is perfect but government loans could be a selling tool in 5-7 years.

Why aren’t more real estate agents telling their buyers about this?

That’s my fault; I forgot to tell you about this.

ADDED ON APRIL 17, 2009:

Jeff Belonger, an FHA expert, cautions us about an FHA assumption:

• Even if you have someone assume your FHA mortgage, you as the seller, you are still responsible for that mortgage also. Meaning, if the new buyer who assumed your mortgage defaults, it will also show up on your credit. Now, there is a way around this though. Many lenders don’t mention this up front, but you can sign a release of liability, which is HUD form 92210-1. If the lender doesn’t mention this to you, then you are suppose to ask for this form. Again, the kicker… if you don’t know about it, how do you ask for it?

• The buyer still needs to be approved for assuming that seller’s mortgage. And this is done only by the lender that holds that note. And they are approved on that current note rate. Keep in mind, even though HUD/FHA has their own guidelines to this, lenders can have specific overlays to the guidelines. Meaning that they can increase the difficulty of obtaining that mortgage.