Sellers Could Attract Interested Buyers by Offering Up Their Loan

30 Dec Sellers Could Attract Interested Buyers by Offering Up Their Loan

A little known feature of loans that are insured by the Federal Housing Administration (FHA) or the Department of Veterans Affairs (VA) gives sellers the opportunity to use their existing loan as a marketing tool with interested buyers. As interest rates continue to rise, sellers with favorable loan terms could attract interested buyers by offering up their loan.

This feature, called assumability, is a huge asset for buyers who can demonstrate their creditworthiness, but would never be able to obtain the same loan terms in today’s market. 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.”

In order to qualify, a borrower must prove their creditworthiness as if they were applying for a normal FHA or VA loan. But once a lender determines that the buyer is worthy of the loan, the seller is released from any future liability or payments. In short, it’s a great feature for both buyers and sellers, and could help streamline a real estate transaction.

Because mortgage rates have been rising during the second half of 2013, the FHA and VA expect to see increased interest in this assumability feature. Katie Miller, the vice president of mortgage products for Navy Federal Credit Union, adds: “In a rising rate environment, assumability is a very attractive option. It ends up making homes that much more affordable.”

The FHA and VA haven’t widely advertised this assumability feature until now, but for interested buyers who qualify, the benefits could be substantial. They would eliminate the need to obtain their own financing, and also avoid having to pay the required mortgage insurance premium upfront that is required when taking out a traditional FHA loan.

Additionally, because the buyer would assume the loan much further into the amortization period, they could stand to save a substantial amount of money. Generally, the payments you make toward a loan at the beginning of the term primarily pay down the interest, however, further into the loan period, monthly payments would be made toward the principal.