I wonder if you could comment on the subject of Loan Assumptions for FHA, VA and USDA loans. Many of these loan products that were originated after the crash have interest rates which are at or below 3%. And in an environment where rates are certain to continue to climb, how could future homebuyers, who could be facing rates of 5% in 2018, take advantage of the rates of old? How could a seller benefit? How would one structure and originate a loan assumption? How’s the gap between the outstanding loan balance and the sales price covered? Is assuming a low-rate home loan a good idea for a first-time buyer with limited resources? Would you mind shedding some light on that subject, please? Thank you!
You ask a great question. Many who compare government loans vs. conventional loans do not fully consider the benefit of the government loan being assumable, which is what I will call “insurance” in case the owner of the home has to sell in a rising-rate environment. If rates rose to 6.0% overnight, these homes with a 3.5% assumable loan would sell more quickly than others.
The requirements for assumptions will vary from agency to agency. Generally, you are dealing with the servicer of the loan and the entity assuming the loan must qualify to make the payments and be an owner-occupant. Generally, when the buyer is qualified, the seller can achieve a release of liability for the loan, which is essential. With regard to VA loans, you have the additional issue of the veteran losing their eligibility -- unless the loan is assumed by another veteran that substitutes their eligibility within the transaction.
With regard to structuring the transaction, the most complicated issue is the down payment. When there is little or no equity in the home, this is not an issue. But if the sales price is $340,000 and the present loan balance is $300,000, there must be a down payment of $40,000. The required money down can be lessened if the buyer can find a second mortgage that goes to 90% or even 95%, but there still would be more money down required as compared to a new government loan. In some instances, the seller may be willing to “take-back” a second mortgage and the CLTV could be as high as 100%. This would typically only be feasible if the seller does not need the cash to purchase another home.
Dave Hershman has been the leading author and a top speaker for the industry for decades with six books authored and hundreds of articles published. His website is www.originationpro.com. If you have a reaction to this commentary or another question you would like answered in this column? Email Dave directly at [email protected].
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