Did you know? FHA loans are assumable! After the demise of stated income loans and 100% financing, FHA loans became extremely popular. Between 2008 and 2015, approximately 20% of all loans used to purchase a home were FHA loans. That means 1 in 5 homes for sale right now could have an assumable loan that a buyer could take over.
What are the advantages of assuming a FHA loan?
- The cost to buy a home: I'm sure you have heard of buyer's closing costs. The largest portion of those closing costs are the fees that are charged by the lender. Buyers are sometimes shell shocked when they learn how much they will be spending for the origination of their home loan. So good-bye lender fees, good-bye appraisal. By assuming a FHA loan, a buyer can save thousands of dollars in closing costs.
- Interest Rate: The terms of the existing FHA loan are fully assumed, and this includes the interest rate. The buyer wins when the interest rate of the assumable FHA loan are lower than current rates. This allows the buyer to save even more money, month after month.
- Time: When a FHA loan is assumed, the buyer takes over right where the seller left off. This means that if the FHA loan originated 6 years ago, the buyer will assume the last 24 years of the sellers 30 year loan. If you look at an amortization table (any mortgage calculation web site will show you one), you will see that during the first years of a 30 year mortgage, very little of the monthly payment is applied to the principle.
What are the disadvantages of assuming a FHA loan?
Namely there is only one disadvantage of assuming a FHA loan as opposed to originating a new one. The difference between the purchase price of the home and the remaining balance of the current loan will have to be made up by the buyer. So if the purchase price is $500K and the loan balance is $450K, the buyer will have to bring $50K to the closing table along with any other buyer closing costs. This can require more cash than getting a new loan, but the cash would be going towards EQUITY in the home, not fees to lenders.
Why does it make sense to assume a FHA loan?
- Save thousands in closing costs
- Save hundreds month after month if the interest rate is lower than today current rates
- Save thousands (or tens of thousands) by assuming a shorter term loan
- Convert cash into equity which in turn will generate more equity
So what are you waiting for? Ask your agent if the home you are interested in has an assumable FHA mortgage!