If you've been keeping an eye on interest rates, you know they have risen in the past few months. Believe it or not, for some sellers this could be good news and put them at an advantage over other sellers.
Who are these lucky sellers and what am I talking about? I’m glad you asked. If you are a seller with an FHA or VA mortgage, those loans are assumable. An “Assumable Loan” is one that allows the payments and liability for the debt to be taken on by someone other than the original borrower.
In recent years, interest rates have been at historic lows. If you are a seller that purchased or refinanced the home with an FHA or VA mortgage at a rate lower than the current rates then you have the added advantage of offering to potential buyers the possibility of taking over your current mortgage at the lower rate. The buyer would essentially pay the seller the difference in cash between the purchase price and the payoff of the current mortgage and assume payments under the seller’s current mortgage.
For example: If the rate on your current FHA mortgage is 3.75% with a remaining balance of $100,000 and an asking price of $125,000. With a current interest rate of 4.5%, a seller can offer the home for sale, have the buyer pay cash for the difference of $25,000 and assume the loan balance at the rate of 3.75%.
In both FHA and VA mortgages, approval is first required by the FHA and VA. Upon approval by the FHA or VA, the seller is released of liability under the mortgage, and the buyer steps into the seller’s place of obligation under the mortgage.
There are advantages in addition to a lower interest rate such as:
•No appraisal required
• Low closing cost. (For an FHA loan assumption, the fee is currently $500 with no other lender fees)
• The loan is not re-amortized, and the shorter remaining term under the mortgage stays in place.
There is one more important issue in connection with a VA loan assumption. The loan should be assumed by another veteran and the buyer’s entitlement swapped out for the seller’s entitlement. If the loan is not assumed by another veteran and the entitlements swapped, the selling veteran’s entitlement is tied up and cannot be used until the loan is paid in full.
Published by J. Chris Huff on March 6, 2017