FHA loans have some wonderful benefits. They also have some unique costs. The costs are related to the mortgage insurance that that funds the FHA program so if a borrower has great credit, plenty of cash on hand, or plenty of equity in a house an FHA loan is not needed. For everyone else FHA can be a tremendous way to reduce interest rates and get into a stable 30-year fixed loan.
I was reading about another benefit of FHA loans at Steve Lines’ excellent blog bestfhalender.com recently. He points out that in addition to giving access to low rates to folks with little cash, little equity, and lower credit scores, FHA loans also are assumable. Here is an excerpt:
What is an Assumable Loan?
Investopedia.com defines an assumable loan as follows:
“A type of financing arrangement in which the outstanding mortgage and its terms can be transfered from the current owner to a buyer. By assuming the previous owner’s remaining debt, the buyer can avoid having to obtain his or her own mortgage.â€
The result of a home purchased through a loan assumption is that the person assuming the loan will simply begin to make the payments as they come due when the title is transferred.
FHA Mortgages Are Assumable.All FHA loans are assumable when processed using HUD’s guidelines. However, mortgages closed on or after December 15, 1989 require credit qualification of those borrowers wishing to assume the mortgage. See FHA Handbook 4155.1 REV 5, Sections 4-1 and 4-4 and Handbook 4330.1 REV 5, Section 6-6.
What Is the Benefit of an Assumable Loan?
The main benefit of an assumable FHA loan is that the interest rate is transferable upon assumption of the loan. If you are financing your home today, this may not seem like a big deal to you. But if you plan to sell the house you are currently financing in a few years from now (or later), it could be. Consider the competitive advantage that you will have as a seller if your house is on the market with at 5.5% fixed assumable interest rate at a time when the market rates are at 9 or 10%. Because your house is much more affordable to a prospective buyer, it will have a higher likelihood of selling.
So if you plan to sell your home in the next few years and currently are in an ARM or an interest rate above 6% you may want to contact us about refinancing into an low rate FHA loan. The fact that a buyer could assume your FHA loan at a low interest rate may be a major selling advantage in the years to come as interest rates go way up to stave off inflation.