Most of us in the industry know that interest rates have already begun to rise, and while they are nowhere near historic levels, they are approaching levels we started to see prior to the recession. Average 30-year rates dipped into the low 3s at the bottom of the 2008 downturn, and held at these levels for some time.
While the recession was detrimental to most of us, many first-time home buyers with undamaged credit were able to purchase at very affordable prices, with very attractive interest rates. FHA loans also came back in full force due to their less stringent requirements for credit and other reasons.
FHA loans tend to have their ups and downs. More recently, the requirement for mortgage insurance to be carried until a debt ratio of 78% was reached was further implemented to stay with the loan, for the life of the loan. On the other hand, almost all FHA loans are assumable. This may afford new buyers the opportunity to inherit some of these FHA loans that were written while interest rates were abnormally low. Also, during much of this time, mortgage insurance was not required to stay for the life of the loan. These buyers may have the opportunity to assume the existing loan, and carrying a second loan at the higher rates for the difference. For loans held for a long period of time, there could be significant cost savings for these new buyers.
In case many of you are wondering, there’s really only one other loan product that is assumable, or at least the majority of the time. That product is the VA product. While the VA loans are almost always assumable, they can have a negative effect for that Veteran and their ability to borrow using the VA product in the future. VA loans have guarantee periods with dollar amounts associated with those periods of time. These dollar amounts are associated with how much the Veteran can borrow using the VA product. That amount has been just over $104,000 since January 1st of 2006. This number represents 25% of the total borrowing power. If the Veteran doesn’t use the entire borrowing power amount on one loan, they can use the remaining balance to borrow using the same loan product for another loan. However, if that loan is assumed, that borrowing power still counts it against the Veteran until it is assigned otherwise. This is an important element for those using this loan program to remember in the event the opportunity arises for this loan to be assumed.
For these opportunities to be a benefit to the buyer and the seller, all parties need to be aware of the current loan conditions, and if the seller has interest in allowing their loan to be assumed. This should also be explained to any real estate agents involved with the transaction, particularly the seller’s agent so it can be used as a marketing tool.
FHA Loan limits are increased in Teton County Idaho, currently at 625,000.