Assumable vs. Non-Assumable Loans

Can someone assume my loan?  In most cases, the answer is no.  The main reason is due to 2 predominant factors: 1) Since the mid -80's conventional financing does not allow the loans to be assumable and 2) Due on sale clauses within the Deed verbiage now forbids the transfer of the loan to the new buyer without recourse from the current servicer/lender.

Of course, assumable loans - with rates in this current market, may become very attractive for buyers in the next 5-10 years as interest rates rise from their current levels.  However, the dangers and risks with assumable loans are too great for lenders and so they are rare.  Below are some good tips on assumable loans and what they mean.

• What does it mean to have an assumable loan?  Basically an assumable loan allows the new buyer to "assume" the responsibility of the seller's loan obligation.  The benefit would be that the new buyer can take advantage of the seller's interest rate and remaining loan term, without having to "re-start" the process.
• What does it mean to have Non-Assumable loan?  A non-assumable loan is when the buyer must find their own financing in order to purchase a home from the seller.  The seller must pay off their loan in order to sell their property.

Now that we have an understanding on "Assumable" vs. "Non-Assumable" loans, let's look at the benefits and what type of programs allow for an "assumable" loan.

The main loan types that offer assumable loans are FHA and VA loans.  Most of these types of loans can be transferred and assumed by a new buyer per the loan guidelines.  However, servicers/lenders typically put restrictions on the potential buyer that will be assuming the loan.  For example, they require the buyer to go through the credit and income underwriting process to ensure they will be able to make the payment.

If the loan is assumed, then there are 3 common ways this is completed:

1. Assignment - this is where the loan is assigned to the new buyer, however, in the event of a default, the original owner could be "secondarily liable" for the resulting default of any remaining obligation.
2. Subject to - this is again, the same as above, however, the original owner could be found liable for any deficiencies if the property is sold and the loan remains outstanding...think short sale.  So a new buyer assumes the new loan and when they sell the property, $30K is still remaining.  The original owner would be responsible.
3. Novation - the least common type of assumption, but the best kind because the original owner/note holder is released from all obiligations of the loan from the time the assumption is completed.  Again - this would require a full underwrite on the new borrower and a very good reason for why they are assuming the loan.  Because, remember, the lender, if the borrower qualifies, would be better served to just enact a new loan at new market rates, etc.

Assumptions, while common in the late 70's and early 80's, are no longer the process that people think it is.  It's never going to be an easy process, but if you have a FHA or VA loan and it is assumable, perhaps in 5 years or so when you go to sell the property, this could be a great selling point for a new buyer.

For more questions and more anwers, you can read up on assumptions: http://web.finweb.com/mortgage/understanding-assumptions.html

FHA - Changes Coming

April 1, 2013 - FHA will be making changes to it's programs in order to continue to create capital and strengthen FHA and its insurance program for many years to come.

If you weren't aware, FHA (the Federal Home Administration) was originally created to help new and first time home buyers purchase a new home using a program that required little down payment and used Mortgage Insurance, both upfront and Monthly Mortgage Insurance, backed by FHA to support these low down payments. 

Over the years the Upfront Mortgage Insurance has changed from 2.25%, to 1.00%, to 1.50%, to the current 1.75%, as well as the monthly mortgage insurance fee from .55% to multiple levels up to its current level of 1.25% per month.  In addition, the Monthly Mortgage Insurance amount, while it was required to be paid for the first 5 years, it would be fully removed once the outstanding principal balance vs the original purchase price reached 78%.  Those above items will be affected by the upcoming changes on April 1, 2013.  Here is a list of the new changes for FHA that will affect new home buyers or anyone looing to use FHA:

• Monthly Mortgage Insurance fee increasing from 1.25% to 1.35%.
• Borrowers will be required to pay the Monthly Mortgage Insurance for the life of the loan

Those directly affect the borrower.  In addition, there are internal changes as well that will have an effect on some but not all borrowers, i.e. manual underwrites are required when credit is below 620 and a total debt ratio is greater than 43%, potential increase to the down payment requirement for principal balances above $625K (probably won't affect AZ market - max FHA is still $362,250).

All of this just points to a more expensive option for borrowers who seek to use FHA.  It doesn't mean that FHA isn't an option, it just means that the option will be more costly come April 1, 2013.  For further reading you can read the HUD mortgagee letter at:

http://portal.hud.gov/hudportal/HUD?src=/press/press_releases_media_advisories/2013/HUDNo.13-010

Changes...

One of the first books I was given to read when i entered into the banking world was, "Who moved my Cheese." by Spencer Johnson.  While simplistic in its approach, the message is loud and clear to all who have read it - change will come.  So, when whange comes - which inevitably it does...what do you do with that change?

I bring this up to enlighten past readers of this blog as to why it has been almost 14 months since I wrote anything.  In a word, "Change".  In late February/early March of 2012 my manager came to our group and invoked the idea of changing to a new company, located out of Arizona.  My trust in him, made the decision easy.  I was on board, and I paved the way by making the move first.  Let's just say it was a hectic 6 months and while business continued to boom, I spent coutless hours managing the deals I had while learning a new process.  It didn't come without moments of, "What was I thinking?"  but in the end it has turned out to be a great move.

Homeowners Financial Group is more than just a company that specializes in mortgages.  It is a community of people that believe in the community they work in and most importantly see that mortgages are necessary for our clients to build lasting memories with their friends, families, and loved ones.

I couldn't be happier about the move and now that the "changes" are not as dramatic as the last 7 months of 2012, I look forward to getting back to providing good information that helps others navigate the waters of financing a new home purchase.