Homeowners with a mortgage insured by the Federal Housing Administration or the Department of Veterans Affairs should consider using their loan terms as a marketing tool when it comes time to sell.
Mortgage loans from both government agencies include a little-known feature known as assumability. In other words, the buyer of a home financed with an existing F.H.A. or V.A. loan may be able to take over, or assume, the seller’s loan, under the same terms, rather than take out a new mortgage.
During periods when interest rates are rising, homes offered for sale with an assumable, lower-rate mortgage may have extra appeal for certain buyers.
“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,’ ” said Marc Israel, an executive vice president of Kensington Vanguard National Land Services and a real estate lawyer. “It’s a very clever idea.”
The savings for buyers assuming a loan extend beyond a lower interest rate. Assuming a loan is cheaper than applying for a new one because there are fewer settlement fees. An appraisal is not required (though a buyer may want to obtain one anyway). And in New York, borrowers assuming a loan do not have to pay the hefty mortgage recording tax a second time, Mr. Israel said.
F.H.A. loans do demand 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, according to John Walsh, the president of Total Mortgage Services in Milford, Conn.
And, he noted, because the original mortgage holder would have been paying the loan for a number of years, the buyer assuming the loan 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.
“In a rising rate environment, assumability is a very attractive option,” said Katie Miller, the vice president of mortgage products for Navy Federal Credit Union. “It ends up making homes that much more affordable.”
She emphasized, however, that loan assumptions are often not a viable option for first-time buyers if the seller has accumulated substantial equity in the home.
Say, for example, that 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.
That can be too big a hurdle for first-time buyers. The more attractive option at Navy Federal is the HomeBuyers Choice loan, which offers 100 percent financing. These loans currently account for about a quarter of the credit union’s purchase volume, and 65 percent of those borrowers are first-time buyers, Ms. Miller said.
Borrowers seeking to assume a loan must also prove their creditworthiness as they would for any F.H.A. or V.A. loan.
Under F.H.A. rules, once a new borrower is found to be creditworthy enough to assume a loan, the lender must release the seller from any future liability for payment of that loan.
Borrowers considering loan assumption should weigh the costs against other loan options, paying attention to the principal and interest payment, the amount of cash required upfront, and the private mortgage insurance premium. “At the end of the day,” Mr. Walsh said, “if the prospective buyer can come up with the down payment and qualify for the loan assumption, then it could be a huge benefit.”
