HOW IT WORKS

FHA and VA Loans Are Assumable:

First, what is FHA and VA? FHA stands for Federal Housing Administration. The Federal Housing Administration is a government backed organization that insures residential mortgages. FHA mortgages are typically one of the safest mortgage options available. The VA, or Veterans Affairs, is another government backed organization that caters specifically to military veterans and their family members.

Loans insured by FHA and VA have always been assumable. During periods when borrowers are concerned about future rate increases, or in times of limited credit availability this gives them an edge.

An assumption of a loan is when one person takes over a loan from someone else. The terms of the loan stay exactly the same but the responsibility changes hands. The person that originally had the loan is completely released of liability and the person who has assumed the loan is now the owner of the home and makes all the payments.

Assumption of these loans requires approval of the buyer by the current note holder. The process is similar to that for a new borrower but with a slightly reduced qualification process. Upon approval of the buyer and sale of the property, the seller is completely relieved of liability.

FHA loans that were closed during the low-rate years of 1996-2003 will become attractive targets for assumption if interest rates rise in future years. Or as the availability of credit becomes less, which is the case currently as a result of the "sub prime" market collapse.

The Value of Assumptions to Buyers and Sellers:
There are two major reasons why assumptions are a great way to buy or sell your home. The first major reason behind assumptions is the lower interest rate on the assumed mortgage relative to current market rates. If the home seller has a 5.5% mortgage, for example, and the best the buyer can get in the current market is 7%, both parties can be better off if the buyer assumes the 5.5% loan.

The second and currently most relevant reason that assumptions are a great way to buy or sell your home is that the qualification and required credit rating process is much less stringent than by current conventional means. A seller can find great success selling his or her home even in a market where it is difficult for buyers to obtain financing by offering an assumption. The buyer is more likely to qualify for the assumption, AND the seller is more likely to find a qualified buyer in a timely manner. An assumption also avoids the settlement costs of a new mortgage. FHA only allows lenders to charge a $500 assumption fee and a fee for the credit report.

The Cost of Assumptions to Lenders:
The benefit to buyer and seller from assuming an old loan comes at the expense of the lender. Instead of having the 5.5% loan repaid, which would allow the lender to convert it into a new 7% loan, the 5.5% loan stays on the books.

Qualifying:

• The new customer and property must meet standard, or slightly reduced underwriting criteria.
• The sales price must be equal to or greater than the current balance. A property cannot be sold for less than the unpaid mortgage balance. LTV (Loan to Value) cannot exceed 100%.
• The customer may be required to provide a down payment, closing costs and escrows. (i.e, If the house is being sold for more than the unpaid principal balance of the loan, the seller isn't paying the closing costs, and the escrow account is short and taxes are paid in advance.) Verification of funds to Close is not required.