Mark and Sharon Fowler of Charlotte, N.C. are simultaneously
planning a home purchase and resale strategy.
Mark Fowler, chief revenue officer and vice president of
production for Residential Finance Corp. in Charlotte, says he and
his wife will use FHA financing to purchase their home even though
they are making a down payment of more than 20 percent and could
easily qualify for conventional financing.
Why? The Fowlers are using the "assumable" status of an
as a future marketing tool to lure potential homebuyers when they
decide to sell sometime down the line.
An assumable loan is a mortgage that the seller transfers to the
buyer without any change to the loan terms or interest rate. Buyers
save on both the lower interest rate and lender fees, says Paul
Defngin, a senior mortgage banker with Apex Home Loans in
"Conventional wisdom says that we're near the bottom for
interest rates and that most people stay in their homes for five to
seven years," says Fowler. "If you think interest rates in five to
seven years will be six percent or higher, then offering buyers at
that time an assumable FHA loan at, say, 3.39 percent should be a
big selling point. It's conceivable to get a $25,000 premium on the
sales price depending on how high interest rates are at that
Here's how it works
FHA loans are fully assumable, but buyers must qualify for the
loan according to
and lender guidelines, says Sue Pullen, regional vice president for
Fairway Independent Mortgage in Tucson, Ariz. Borrowers would need
to provide full documentation of their income and assets and have a
and low enough debt-to-income ratio to qualify for a regular FHA
Let's say the original mortgage was for $300,000 and the balance
is down to $200,000 when you've decided to sell. The buyer assumes
the remaining balance on your loan and must come up with $100,000
in cash to reach the original loan balance.
To come up with that difference, buyers can either apply for a
second loan or ask the seller to finance the balance, says Joe
Buxton, vice president of sales for Residential Finance Corp. in
For example, Buxton says, the seller could offer an assumable
loan with a balance of $200,000 at 3.5 percent and finance the
additional $100,000 at 8 percent if
are around 6 percent. If that's the case, the buyer would benefit
because the average interest rate on the two loans would be 5.75
percent, below the market rate of 6 percent.
Timing is key
Timing is key when offering an assumable loan, says Defngin.
"The sweet spot is probably right around five to seven years,
because if you wait longer, the balance of the loan will have been
paid down and the home value may have risen so that the loan you're
offering will cover very little of the sale. Offering an assumable
loan could be a relatively small advantage to the seller if the gap
between the loan balance and the sales price is large."
Disadvantages of FHA loans
Recent changes have caused the price of FHA mortgages to
increase. As of April 1, 2013, mortgage insurance premiums have
risen, and as of June 3, 2013, FHA borrowers are required to pay
mortgage insurance for the life of the mortgage if they make a down
payment under 10 percent, says Defngin. "Even if you make a down
payment of 10 percent or more, you have to pay mortgage insurance
for at least 11 years."
"Right now mortgage insurance premiums are tax deductible, which
helps, but if you have good credit and can make a down payment of 5
percent or more, it usually makes more sense to take out a
conventional loan," says Pullen. "On a conventional loan, you can
often pay the mortgage insurance upfront and save $200 or $300 a
month in extra payments."
Pullen continues, "The fact that FHA loans are assumable is a
nice side benefit for someone who is already planning to use FHA
financing, but I don't think that's enough of an incentive to
choose FHA over conventional."
Be sure you calculate both the short- and long-term cost of an
FHA loan versus a conventional loan before making your mortgage