Tuesday, June 16, 2009

DON'T OVERLOOK ASSUMABILITY CLAUSE ON FHA LOANS

A few years ago, FHA loans were about as common as eleven game winning streaks for the Colorado Rockies (I had to slide that in somewhere - go Rockies!). Today, however, they account for about half of all mortgage loans being originated.

The primary reason that FHA has become so dominant in the marketplace is that these loans are insured by the federal government - if the borrower defaults, the government steps in and pays off the lender who made the loan, provided the underwriting of the loan complied with FHA guidelines. They're the safest loans lenders can make, because Uncle Sam is acting as a backstop.

The other reason is that, as you have heard, banks aren't making loans like they used to. At least, not with their own money.

The underwriting guidelines on conventional loans are tighter today than they have been in 15 years. This is an over-reaction (albeit, an understandable one) to the massive losses the banks have suffered as housing markets have crashed around the country.

So into the gap has stepped FHA.

FHA loans allow borrowers to purchase a home for as little as 3.5% down - and that money can be "gifted" from family members or other sources.

But here's the other key - the hidden value of an FHA loan that will make these loans of today look even better two or three years down the road...

FHA LOANS ARE FULLY ASSUMBALE WHEN YOU SELL YOUR HOME (AND MOST CONVENTIONAL LOANS ARE NOT!)

Let's take a look at why this matters.

With the government engaged in unprecedented spending to prop up the economy right now, the big fear on the horizon is inflation - which means higher interest rates.

So let's say you decide to sell your home in three years, and by that time interest rates are (hypothetically) in the 8% range. You paid $175,000 for your home in 2009 and decide to sell it for $190,000 in 2012.

If your interest rate was 5.5% on a 30-year fixed rate FHA loan, after three years your loan balance is appoximately $162,500 (provided you made a 3.5% down payment on the original purchase and have stayed current with your payments).

The payment on your FHA loan (principal and interest) is approximately $971 per month.

In an assumption, the buyer agrees to take over your loan and make the payments going forward, while paying the seller the difference between the agreed upon purchase price and the loan balance at closing.

If a buyer was to make a $27,500 down payment and take out a $162,500 loan at 8% (in our 2012 purchase scenario), their new payment would be $1,192 - or $221 per month more than the payment on your existing FHA loan.

But it gets even better...

Your original FHA loan originally had 360 scheduled payments - of which you made 36, under our scenario.

So the loan your buyer assumes has only 324 remaining payments... instead of 360 payments as would be the case under a new loan.

Can you see why FHA assumptions can be powerful?

This is something very few people are recognizing right now, for whatever reason, but I'm telling you... in a few years the buyers of today using FHA financing are going to come out smelling like a rose.

This truly is the best buying opportunity at the entry level of our market in 15 years or more.