Loan Modification

Assumable FHA Loan Can Help You Sell Your Property

By Gina Pogol

Everyone and their dog (of course my dog talks; doesn’t yours?) these days is predicting that mortgage interest rates will be increasing in the next year, especially once the government stops buying mortgage-backed securities in March 2010. And that’s a big enough reason to refinance to an FHA loan now if you haven’t already.

I’m not refinancing because I plan to sell my home in the next year or two, you say. I won’t break even before I have to sell. But you will. Because you can offer your next buyer something that may add serious value to your home — the chance to assume your FHA mortgage.

What’s the value of an assumable FHA mortgage? It depends on how high mortgage interest rates climb by the time you sell your home. But it could be a lot. On a thirty-year fixed-rate mortgage, and interest rate reduction of .5% costs between 2.5 and 3 points. So if your loan carries a 5% interest rate and the market rate is 7% by the time you sell your property, that assumable  FHA loan would save your buyers over ten points on their loan fees! It may be a buyer’s market for your neighbor, but with an FHA loan on the table, it becomes a seller’s market for you.

What’s involved with assuming an FHA loan? The borrower does have to qualify, meeting FHA’s credit and income guidelines, but no appraisal is required and processing is cheaper. Fees for processing assumptions must be based on the mortgagee’s actual costs and cannot exceed the maximum amounts authorized by HUD. Assumption creditworthiness review processing must be completed within 45 days from the date the lender receives all necessary documents. Except for older FHA loans (not subject to the HUD Reform Act of 1989), investors are not allowed to assume FHA loans. If the new buyers plan to use the property as a second home, the loan-to-value must be reduced to 85%.

Once the new buyer is approved to assume your FHA loan, you should be released from liability by your lender. The lender completes a form HUD-92210, Request for Credit Approval of Substitute Mortgagor, or a proprietary form designed to do the same thing.  The lender also needs to complete form HUD-92210.1, Approval of Purchaser and Release of Seller, or a similar proprietary form, which constitutes a formal release of liability. Only the lender can execute this release of liability, which keeps you out of trouble if the buyer subsequently defaults on your old loan.  The lender is required to release all parties from liability once the assuming borrower is found creditworthy.

Full post as published by FHA Mortgage Guide on February 25, 2010 (boomark / email).