About FHA mortgages. 

Assumable vs. non assumable.  FHA vs. conventional.  Is assumable a good selling feature?

A customer, Jeff, in Monroe County, PA recently had a competitor of ours try to talk him into canceling his loan with us to take an assumable loan with him. 

The loan officer told Jeff that FHA loan that is assumable, at a low rate, can be a great selling feature for Jeff's $175,000 home in 5 or 6 years when the Jeff may be ready to move up to a larger home.

Here is what Jeff found out and decided not to take the assumable mortgage.  This information is not widely known and was not pointed out by the other loan officer:

1) The rates and fees of an FHA loan are higher. Jeff could have financed them, but they are still higher. He would have ended up losing that money when he sold his home and had less equity to receive in the form of a check to use for his next house.

2) If someone assumes an FHA loan, they assume the balance owed and remaining term.

 They have to pay the difference of (SALES PRICE- the amount Jeff owes on mortgage at time of sale) in cash

...Perhaps this is why I in 14 years we have not encountered anyone actually assuming a loan...

In 5 years if Jeff sold his house for $225,000 and he had the loan paid down
to $140,000, the buyer has to pay the difference in cash, plus their closing
costs. That is $95,000 cash a buyer has to bring. People do not typically have that type of money on hand, not those looking in the price range of Jeff's house (usually a starter home).

Jeff could not take anything but a 30 year loan if he was concerned about assumability.  Even then the buyer will have to finance the amount owed over the remaining term, which in 5 years is a 25 year loan for the new borrower.  A 30 year loan is not an option for them.  This means a higher monthly payment. 

So Jeff decided not to pay the higher rate and fees for a loan that most likely will not be assumed.

 

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