From The Broker’s Desk: November 2022

Safe to Assume?

Did you know that government backed loans such as FHA and VA are assumable? You’re probably wondering just what the heck that means, so allow me to explain.

Government secured loans contain a clause allowing a qualified buyer to assume the loan in its current status. Let me give a scenario:

Jill Homeowner purchased her house for $150,00 in 2017 with an FHA Mortgage at a fixed interest rate of 3.5%. She has decided to sell her house for $175,000 and Jack Buyer would like to buy it but is concerned that he won’t be able to afford it at today’s rate of 6.5%. Jill contacts her lender who qualifies Jack for the existing loan, then releases Jill from the loan and adds Jack as the responsible party. Jack will then take over where Jill left off with her current balance, remaining term, and fixed 3.5% rate. But what about the difference in the current loan balance and the sales price? Jack can either pay that out of pocket or, if approved for both, take a second mortgage for the difference.

Is this always the solution? Not necessarily. If the seller has owned the home a long time and paid the principal down considerably it may not be worth the effort. But if they haven’t owned it long, and there’s a feasible way for the buyer to bridge the equity gap, it could be a great solution for all involved.

Buyers – be sure to ask what type of financing the seller’s currently have. If it is FHA (Federal Housing Administration), VA* (Veterans Administration), or USDA (United States Dep’t. of Agricultural) the rate will be assumable, so it’s worth looking into. Sellers – if you currently have one of these loans on your home and have not paid much of your principal down this is a major tool to utilize! Reach out to your current lender or loan servicer to see what the process is so you can provide the option to potential buyers. (Here’s a link to an article I found that goes into more detail.) This is not a new tool, these programs have always been assumable, but because the rates have been so low it hasn’t been front of mind or top of the headlines.

The moral of this story is, where there’s a will there’s a way and if you’re working with a professional who knows the market you can always reach your goal. If you have any further questions or would like to discuss your options, give our team of professionals here at White Diamond a call! We are more than happy to help you navigate the process and get you where you want to be.

*The buyer does NOT have to be a qualified veteran/service member to assume the loan.

Melissa Hornbeck
White Diamond Realty