“For the Benefit of Mr Kite” – The Beatles
The low interest rates secured by borrowers recently on FHA mortgages may become valuable in a different way in the future. FHA (Federal Housing Administration) and VA (Veteran’s Administration) mortgages are assumable at the existing interest rates subject to buyer qualification. When I began my real estate career in 1985, interest rates were 13%. It was like “striking gold” when we determined that a seller had an assumable FHA or VA loan with a lower interest rate!! It was especially beneficial if the difference between the assumable loan amount and the market value or sales price were not too extreme (thus, the down-payment was reasonable).
The benefits are not only assuming a lower interest rate resulting in lower payments but the closing costs on an assumption are much less than originating a new loan. The fact that the mortgage is already into an amortization schedule and that lower interest rate loans amortize faster than higher interest rate loans make it build equity faster than a new mortgage. Buyers wanting to assume an existing FHA mortgage must be owner-occupants and meet the current FHA guidelines. Applicants should have a minimum 600 credit score, total debt with house payment to be assumed not to exceed 41% of their monthly gross income and meet other standard income, credit and qualifying requirements.
When interest rates eventually rise, assumable loans will provide an opportunity for buyers to lower their cost of housing significantly while improving their wealth positions. And, simultaneously provide sellers with a marketing boon and possible advantage in the real estate marketplace!!