Government-backed mortgages – USDA, VA, and FHA home loans – have a feature that other loans do not—assumability. It’s a little-known feature that can provide additional value to a property.
A loan that is assumable will have an assumption clause written into the note. That means the note may be transferred to a buyer in lieu of the buyer getting financing from a mortgage company or bank independently. Everything about the loan is essentially transferred from the seller to the buyer including the rate and term. That is where the value lies should the rate on the existing note be lower than current market.
Qualifying vs. Non-Qualifying Assumables
FHA and VA loans carried what is called a non-qualified assumption clause. This means anyone could assume the loan without regard to credit or income. For decades, those who could not be approved because of income or credit would be forced to find homes for sale that had an assumable mortgage. In 1986 however, FHA changed the assumption policy to require that buyers be approved base upon standard FHA approval requirements. Good credit, income and down payment verification for instance would be required on all FHA assumptions. In 1988, the Department of Veteran’s Affairs made a similar adjustment and no longer accepted a non-qualified borrower to assume a VA loan.
FHA and VA loans that were originated after the changes were made are all assumable but “qualifying” assumable. The buyer who wishes to assume a mortgage will still be evaluated in the very same manner as if applying at another lender for a new mortgage. There will be tax returns, pay check stubs and bank statements required.
But today the advantage isn’t simply assuming an existing mortgage but taking over a mortgage with a much lower rate. Remember, when assuming a mortgage, everything transfers to the person assuming the note.
The Lower Rate Makes Assumable Mortgages Attractive
Here’s where it gets interesting. Say you’re a property owner and bought and financed a home in January of 2013 with a 15 year fixed rate loan. Your interest rate on the loan is 2.50 percent. Today, a 15 year fixed rate is closer to 3.50 percent. Still good but not as low as when the 15 year record low rate was set. And you have the loan on your note and because it’s an FHA loan it’s assumable. The buyer can apply for an assumption and take over your mortgage and the rate that goes along with it.
When you have an assumable feature in your mortgage loan and rates are higher than what you currently have, that’s a major selling point and is something you and your agent should promote. And it’s not simply the lower rate but in reality what the rate represents—monthly payments.
Take for example a 30 year mortgage with a 3.50 percent rate on a $200,000 loan. The principal and interest payment is $898.09. Now let’s pretend that 30 year rates are at 4.75 percent, what is the payment? $1,043.29, or $145.20 more. That’s quite a difference but even more so if you take that savings and calculate it over five years. That’s $8,712.28 in savings. That’s what your assumable mortgage brings to the table. And there’s hidden value there.
Sells Your Home Easier with an Assumable Mortgage
There are two ways your assumable mortgage can benefit you. One, the lower rate associated with the note if rates are higher today than what you currently have and two the added value the mortgage brings. If a buyer could save more than $50,000 over the life of a loan by assuming your mortgage, isn’t that something you should promote? Of course it is and can be something that can command a higher price compared to other homes in the area.
On the other hand, if the market is slow and buyers are harder to come by, the assumability on your mortgage can help attract more buyers when they see that your rate is much lower than what is available in the current lending environment.
Is the rate on your loan 3.50 percent and the best that is out there is over 5.00 percent? Then you have a selling feature that doesn’t come with new appliances or a fresh coat of paint. Your assumable loan is an advantage that can’t be bought, replaced or refurbished. It’s a lower monthly payment over the life of the loan worth thousands.