Assuming a FHA or VA Loan

Assuming a VA Home Loan

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.  

Paying Points to Lower the Rate

Paying down points can end up helping you save money

Paying Points on Your Mortgage

One way to lower your mortgage payment is “paying points” on your mortgage. This means to buy down the interest rate for the life of the mortgage with discount points at closing. A discount point is one percent of the mortgage borrowed. Lenders collect this fee up-front to increase the yield on the note in exchange for a lower interest rate.

Two other commonly used ways to lower your mortgage payments are to make a larger down payment (especially if it eliminates private mortgage insurance) and improve your credit score before applying for a mortgage. However, you may get additional benefit from paying points on your mortgage

Here’s an Example

Let’s look at two options on a $315,000 mortgage for 30 years at 4% interest with no points compared to a 3.75% interest rate with one-point. The principal and interest payment on the 4% loan is $1,503.86. Compare this to $1,458.81 on the 3.75% loan.

The $45.04 savings is available because the buyer is willing to pay $3,150 in points. By dividing the monthly savings into the points paid, you can determine the breakeven point. In this example, if the buyer is plans to stay in this home for at least 70 months, they would recapture the cost of the discount points. Each month after that would realize savings.

Accelerating Amortization and Tax Benefit

Another interesting thing to consider is that lower interest rate loans amortize faster; in other words, they build equity faster by paying off the loan sooner. If the buyer stayed in the home for 10 years, their unpaid balance in this example is $2,117.38 lower than the 4% mortgage. Combine that with the $2,259.29 in savings from the breakeven point to the end of 10 years and the buyer. This makes the buyer is $4,372.67 better off buying down the mortgage by paying the additional points.

For a person buying a home, it is sometimes difficult to come up with the extra amount for the points. However, an additional benefit you have is that the points paid are considered interest by IRS and can be deducted in the year paid.

How Do Discount Points Work?

A rule of thumb commonly used is that one discount point lowers the quoted mortgage rate by ¼% or 25 basis points. A lender may quote X% + .6 points for a mortgage. Using this scenario, to lower the mortgage rate by .25%, the buyer would need to pay 1.6 points. It is important to note that each lender determines the pricing of points for the loans they make.

It may be beneficial to a buyer to pay points depending on how long they plan on being in that home. Learn more about whether you should consider paying points. Use this Will Points Make a Difference calculator and download the Buyers Guide.

The Value of Having a Real Estate Agent

The value of having a real estate agent

Before you shop for your new home, don’t underestimate the value of having a real estate agent or broker to help you. This short presentation below can provide topics to cover when you are selecting an agent to help you.

Remember, an agent can help you in multiple areas of the home buying process. Whether that is learning more about the area you are searching in or actually having property examined to look for any potential problems, they should help you.

On top of that, they can connect you with financial professionals and mortgage specialists. They can get estimates for work that needs to be done to the property before you take ownership. And, they can assist with any contractor searches because of their local networks.

Finally, they can negotiate in your behalf to look for better financing, pricing terms and features.

Most Valued Real Estate Agent Benefits

We Can Help

Want to learn more? Contact us by calling us at (510) 244-0085, or CLICK HERE to leave us a message. Whether you need assistance in all areas of home buying, or if you are unsure of only a single aspect of the process, we are here to help you. We can show you the real value of having a real estate agent

Homeownership Cycle and Inventory

Moving to a Larger Home

An interesting homeownership cycle begins with a starter home and progresses to larger and smaller homes throughout a person’s lifetime. Within a few years after purchasing their initial home, they might move up to a little larger house. They could simply want a larger home and can afford it, or their increased family size may be motivating the move.

While the children are small, a homeowner can probably get by with less space. As the children grow or with the addition with more children, the need for more room becomes more pressing. Depending on the size of the family, this will last some time. But the cycle goes the other way too. As children leave for college or find their own living space, parents may find that they no longer need the larger home.

Moving to a Smaller Home

In the interest of saving money or possibly convenience, owners may migrate from a larger home to a smaller home. This occurs before they consider a move to an assisted living facility or possibly, a nursing home. Some homeowners even retro-fit a smaller home with equipment and safety devices that will allow them to continue to live independently, Another alternative, many homeowners are electing is to move in with their children or other family members.

How Many Times We Move In Our Lifetime

According to the US Census Bureau’s American Community Survey, a person in the United States can expect to move 11.7 times in their lifetime. When that person is 18 years old, they can expect to move another 9.1 times. By age 45, they can expect another 2.7 moves in their lifetime.

How the Homeownership Cycle Affects Available Home Inventory

One of the suspected reasons affecting the low housing inventory in America now is due to a change in the homeownership cycle. Homeowners who would usually move at this time don’t because of current constrained inventories. They are afraid their home will sell and they may not be able to replace it with what they want. Builders have not kept up with the demand in the past twenty years. This has been a major contributor to the low inventory that housing is currently experiencing. Estimates show that it will take two million new homes a year for ten years to meet current levels of demand.

There are also other factors involved like the fact that since 2007, the owner’s tenure in their home has more than doubled from five years to 10.6 years. People are staying in their homes longer which means the homes are not coming on the market for sale.
Another consideration is that sellers with extremely low mortgage rates are reluctant to buy another house which would have to be financed at a higher rate than they are currently paying.

Get Help When You Make Your Move

Sound Investments, Inc. can provide important information and has the experience essential to making a smooth move. We can help you – regardless of where you are in the homeownership cycle. Having the facts reduces the risk of unexpected outcomes. Click here to contact us now if you have questions about selling your home.

Risky Negotiation Tactics

Risks Not Worth Taking

Today’s housing market’s extremely low supply. That means it is especially important “NOT” to rely on risky negotiation tactics. You don’t want to lose a property you truly want just because you relied on a weak tactic.

  • Lowball offers that offend sellers
  • Asking for the “Moon” in the way of personal property or concessions
  • Using inspections to renegotiate AFTER the contract was accepted
  • “Take it of Leave it” offers hoping to intimidate the sellers into a accepting your offer

Sellers in the current market know that demand is high. They will most likely receive multiple offers. Many of those offers may even be above asking price. Therefor, using intimidation or being obstinate about things that are not really important doesn’t help your bid get accepted.

So is it really worth losing the home of your dreams?

Our Advice

Instead of taking a negative approach and using risky negotiation tactics, you can take actions that can increase your chances of success. If you haven’t read our post about “Writing a Successful Offer in a Low Inventory Market,” Click here and learn some tricks to help your bid get selected.

Your Tax Refund Could Open the Door

You can use your tax refund to help purchase a home.

One of the silver linings to filing your income tax return is when you find out that you are going to receive a refund. Your tax refund could literally open the door to owning a home. You can use If you happen to be one of these fortunate taxpayers, your next decision is what to do with it.

With the average tax refund near $3,000, it could be the ticket to buying a home sooner rather than later. Regardless of the size of your refund, it can be used toward the down payment or closing costs of the home.

Most people think it takes 10% or more down payment to purchase a home, but actually, it is much less because of several low down payment mortgages . There are VA and USDA mortgages that allow for no down payment for qualified buyers. FHA has a 3.5% down payment program and FNMA and Freddie Mac have 3% down payment mortgages for qualified creditors as well as 5% down programs.

Closing costs for originating new mortgages can easily range from two to three percent of the purchase price but most lenders will allow the seller to pay part or all of them based on the agreement in the sales contract. If you are using a VA or USDA loan, your refund could go toward paying the closing costs.

On a practical matter, if you are due a refund, have it deposited directly into your account. It is necessary to trace the source of the funds. Cashing a refund check and depositing the cash adds an unnecessary aging requirement.

Maybe you have the money saved for your down payment and closing costs but you have other debt that is keeping you from qualifying for a mortgage. The IRS refund could be used to pay down that debt. However, you need solid advice from a trusted mortgage professional before you do that.

While the average tax refund might not cover the down payment on the median price home, it certainly helps. Your refund could make it a simple as 1-2-3 to get into a home.

Get the hard, cold facts for the homes and mortgages in your area and price range.
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Download the Buyers Guide and contact me at (510) 244-0085 or email me at [email protected] to get started. Or, click here and fill out our contact form and I’ll get back to you as soon as possible.

Things That Affect Your FICO Score

managing your credit essential to buying property

A solid FICO Score helps optimize your ability to obtain a better home loan. And, since the overwhelming majority of us don’t have the ability to purchase a new home with a cash payment, getting a good loan with great terms is essential to our ability to purchase a new property. It also can have a major impact on your finances going forward over many years.

A FICO score is the credit score created by the Fair Isaac Corporation (FICO). Lenders use borrowers’ FICO scores, along with other details on borrowers’ credit reports, to assess credit risk and determine whether to extend credit. Having a strong FICO Score positions you favorably for quicker approval and better lending rates.

There are several ways you can optimize your score. The main “levers” or contributors to your score are:

  • Your Payment History
  • The Amount of Money You Owe
  • The Length of Time of Your Established Credit
  • Any New Credit You Have Applied for and/or Received

You can improve your FICO Score, and therefore increase your ability to qualify for favorable home loans by managing these levers. For example, you can:

  • Pay all your bills on time.
  • It’s important to avoid going to collections because an account that goes to collections stays on your credit report for 7 years. This is true even if you pay it off.
  • Keep your credit card balances low. Having higher AVAILABLE credit improves your FICO Score.
  • Pay off your debts. Lower levels of outstanding debt helps your score. Also, consolidating your debt so you have fewer accounts may also help.
  • The number of credit inquiries you make do affect your score. So, don’t make inquiries you don’t really need.
  • Don’t open accounts you don’t need.
  • Make sure you show you have managed credit responsibly. Responsibly managed levels of credit will result in you being rated as a better risk than if you had no credit or debts at all.

Watch the short video below:

Check out more helpful hints to make buying a home easier on our Home Buying Tips category page. Click here to learn more.