Assuming a FHA or VA Loan Hasn’t Been Popular
You may not have heard of anyone assuming a FHA or VA home loan on an existing mortgage. You might not have known they were even possible any longer. The reason this type of loan assumption hasn’t been popular for over thirty years is simple. It didn’t make financial sense. But now that interest rates are increasing, it may be an opportunity for some homebuyers.
Conventional loans added clauses to mortgages back in the early 80’s that gave the noteholder the right to raise the interest rate if a loan was assumed, as well as require the new buyer to qualify for the loan. This essentially ended the practice of assuming conventional mortgages.
Then, in the late 80’s, FHA and VA mortgages did impose the right to qualify the new buyers, but the big difference was that the mortgage rate would remain the same as that for the original borrower. Even so, it still effectively ended the assumptions of FHA and VA mortgages because rates on mortgages trended down for the next thirty years.
Why FHA and VH Loan Assumption Is Now Worth Looking Into
There was really no benefit to assume a mortgage that still required qualifying because it was possible to obtain a new mortgage with a lower rate. Generations of buyers have never even contemplated assuming a mortgage. However, now it might well be an alternative that will lower the cost of buying a home. This is because mortgage rates hit a bottom in early 2021 and have been increasing ever since. Therefore, if the interest rate on the existing mortgage is less than the rate on a new mortgage, there could be a savings.
In addition to that, there are fewer closing costs involved on assumptions of FHA and VA mortgages than originating new mortgages. Another benefit is that when you assume an existing mortgage, you will be further into the amortization schedule. This means your equity-buildup occurs faster than it would with a new loan. And finally, lower interest rate loans amortize faster than higher rate loans.
Potential Difficulty in Assuming a Loan
The difficulty in this situation is that many buyers don’t have enough money to cover purchasing the equity on the existing home. But there is a potential remedy for that. Let’s assume the buyer was considering a 90% conventional loan. If they identified a home with an assumable mortgage, they could put the same 10% down payment in cash toward the equity. The buyer could then secure a second mortgage for the difference.
There are several lenders that make this type of loan. Buyers need to shop and compare rates and fees just like they would on a new first mortgage. Your agent can suggest lenders for second mortgages.
If you want to take advantage of VHA loan assumption, it may be difficult to find them. Unfortunately most search filters on portal websites do not include assumable mortgages. You can get assistance from your real estate agent to find them.