Home loans insured by the FHA or VA may be assumed by purchasers

If you are a Sacramento homeowner and your mortgage happens to be insured by the Federal Housing Administration (FHA) or the Department of Veterans Affairs (VA), your existing home loan is assumable and may give you a distinct advantage over other Sacramento home sellers if you want to sell your home.   In other words, a home buyer looking at Sacramento real estate or searching Sacramento homes for sale, could consider taking over or assuming your current loan and terms instead of applying for a new mortgage.

This was very recently an ideal situation for one of my clients, who had a home for sale in Sacramento.  Prospective buyers were not only interested in my client’s Sacramento home, but they were also very interested in assuming my client’s lower-rate mortgage, rather than applying for a mortgage with a higher rate. 

Naturally, if current mortgage rates are lower than the rate on the mortgage held by the seller, it would make more sense to apply for a new mortgage, rather than assume the seller’s existing mortgage. 

The savings for prospective home buyers considering an assumable loan go beyond a lower interest rate, and include lower fees.  FHA loans do require borrowers to purchase mortgage insurance, however because the mortgage will have already been paid down to some extent by the original homeowner, the buyer will be assuming the loan and purchasing insurance at a point that is much deeper into the amortization schedule than would be the case on a new mortgage.

In a rising interest rate environment, assumable home loans make more sense, however if the seller has accumulated a lot of equity in the home, loan assumptions may not be viable for first-time home buyers.  For instance, let’s assume that the seller’s loan balance is $300,000 and the seller is asking $400,000 for the home.  The buyer assuming the loan would have to provide the $100,000 difference either in cash or some other subordinate financing.  This would be a tall order for most first-time home buyers. 

Also noteworthy, any purchaser wishing to assume an FHA or VA loan would need to establish their creditworthiness.  But once a purchaser has established their creditworthiness to assume a loan, according to FHA rules, the home seller must be released by the lender of any liability in the future for payment of that loan.

If you are looking at homes for sale in Sacramento, you may want to determine if the existing home loan is insured by the FHA or VA.  If it is, explore the interest rate of the loan and compare it to the current interest rate environment, the amount of money you would need upfront to close the loan, the fees, and the cost of mortgage insurance.