Assumption advantage on the FHA loan

In addition to a low interest rate and a reduced required down payment, the FHA loan offers today’s homebuyers another little-noticed advantage over the conventional/conforming loans.

Unlike most conventional loans, FHA loans are assumable which means that when the FHA borrower sells his house in the future, a prospective buyer may assume his loan.

Think about it. Pardon the pun but let’s “assume” that in 2010, Happy Homebuyer takes a 30-year fixed-rate FHA loan at 4.25 percent. In 2013, Happy decides to put is house on the market when the average 30-year fixed-rate loan is at 8 percent.

Unlike other sellers with un-assumable conventional loans, Happy has the luxury of marketing the sale of his property with the offer of a 4.25 percent assumable FHA loan.

As interest rates rise over the next few years, homeowners, like Happy, with an FHA loan will have a distinct marketing advantage. However, there will be a limited window of opportunity for those sellers since the “assumability” advantage is dependent on the principal balance of the FHA loan, the interest rates and the value of the property at the time of sale.

In other words, over a longer period of time, the paid-down principal balance on the loan and the appreciation of the property will reduce the lower rate advantage to a future buyer. This is because the buyers will be required to make a larger down payment to qualify for the assumed FHA loan and, as a result, those buyers may be better off seeking their own financing instead of assuming the FHA loan.

I suspect that we will see a good number of FHA assumption transactions over the next three to six years “assuming” those FHA borrowers take advantage of the assumability feature.