The Federal Housing Administration (FHA) and Department of Veterans Affairs (VA) have done little advertising of a unique feature called assumability until now. Sellers with FHA or VA loans are now taking advantage of the feature that allows buyers to acquire their loan under the same terms and conditions.
Interested buyers who can prove their creditworthiness could stand to benefit big time from this feature. The assumability feature means that buyers could avoid having to find their own financing, and also end up with a loan with more favorable terms than they could find in today’s market.
Mortgage rates have been ticking up during the second half of 2013, which has prompted some interested buyers to take a step back. But as Katie Miller, the vice president of mortgage products for Navy Federal Credit Union, points out: “In a rising rate environment, assumability is a very attractive option. It ends up making homes that much more affordable.” Incidentally, the FHA and VA are expecting to see more home shoppers take advantage of this unique feature.
Additionally, sellers might also take advantage of assumability by using it to market their home. Buyers who are able to take over an existing FHA or VA loan would avoid having to pay the required mortgage insurance premium upfront that is required when taking out a new one. Marc Israel, an executive vice president of Kensington Vanguard National Land Services and a real estate lawyer, said: “You could now have a seller saying, ‘I have a great house to sell you and a great mortgage to go with it, which is better than my neighbor, who only has a great house.’ It’s a very clever idea.”
There are certain criteria that a borrower must meet in order to take advantage of assumability. This includes demonstrating their creditworthiness as if they were applying for a normal FHA or VA loan. But the feature has its merits for both buyers and sellers, namely because a seller is released from any future liability or payments once it is determined that a buyer is creditworthy.
This new feature also gives buyers an advantage over using traditional financing because of the point where they enter the loan. If the seller has been making payments for years, the buyer is assuming the loan much further into the amortization period, which means their monthly payments would be paying down the principal instead of going toward interest.