Leverage Your Assumable FHA Loan To Sell Your Home For More Money
What if you could offer the buyer of your home your current mortgage rate? As you can imagine, that would be quite a draw.
If you have an FHA loan, it’s a real possibility.
For example, you have a 3% mortgage rate. Today’s FHA rates are closer to 7%. On a $300,000 loan balance that’s a savings of over $700 per month.
What home price do you think your buyer would pay for that?
FHA loans are assumable, meaning your buyer may qualify to "assume" or take responsibility for your loan instead of getting a new one.
You could fetch top dollar for your home simply because of your assumable mortgage. Here’s how.
How Your Buyer Can Assume The Loan
Loan assumptions were a near-extinct feature of FHA loans when rates were low. Neither the buyer nor seller wanted to learn how they worked because the buyer could apply for their own low-rate FHA loan.
Now, there’s serious motivation on both sides.
You could potentially sell your home for a higher price than your neighbor because of your low FHA rate.
And the buyer could save hundreds or perhaps over a thousand dollars per month by assuming your loan.
Still, there’s no streamlined way to assume a mortgage. It could take some legwork from you and your buyer to make it happen. Here’s the general process, which may look a bit different depending on your current loan holder (servicer) and your buyer.
The FHA Loan Assumption Process
An assumption is not as easy as crossing your name off of your loan documents and writing in your buyer’s name.
Your buyer must qualify for the loan. And, your existing FHA loan holder must agree to approve the new buyer. Here’s the general process.
Contact the Servicer
Before you list the home, make sure your servicer knows your plan. Your servicer is the company to which you make payments.
Make Sure the Servicer Can Review The Buyer’s Assumption Application In A Timely Manner
You don’t want to advertise an assumption just to find out that the servicer takes an inordinate amount of time to review assumptions.
Nearly all FHA loans are assumable unless that particular loan is barred for some reason by the Department of Housing and Urban Development, or HUD, the overseer of FHA loans. In most cases, the FHA lender or servicer must perform the review, as much as they wish this were not true.
But the lender could drag their feet. There's nothing in it for them.
Sometimes the servicer is also a mortgage company. In this case, the process could be faster since it can use its own HUD-approved FHA underwriters. Otherwise, it can use another company to review your buyer’s file. Ask your servicer about its assumption turn times.
Estimate The Required Down Payment
The buyer must have an adequate down payment to cover your purchase price less the existing loan balance.
See the following example.
Existing FHA Loan
Down Payment Required
This is equivalent to a 14% down payment, much more than the standard 3.5% down required for a new FHA loan.
Make sure you advertise the upfront cash requirement so you don’t attract buyers who think they need the standard 3.5% down.
Buyers can receive a second mortgage to cover the difference, up to 96.5% of the sale price adding together the existing and new loan amounts.
List The Home
Ask your real estate agent to list the home at a price that reflects the benefit of the assumption.
This doesn’t mean an unrealistic price. But you may be able to justify a higher list price, or get the home bid up in a multiple-offer situation.
Have the Buyer Apply With Your FHA Loan Servicer
Your servicer will send a list of required documents needed to approve the assumption. Have your buyer send these items to your servicer directly. Due to privacy and liability issues, do not agree to deliver the documents to your servicer for the buyer.
Receive a Release Of Liability From Your Servicer
Perhaps the most important part of a loan assumption is releasing yourself from the liability for the loan.
This is achieved when you receive a form called “HUD-92210.1” or “Approval of Purchaser and Release of Seller." It must be worked up by the servicer and signed by all parties.
Until then, you are 100% liable for the loan. Another fun fact: if you allow a buyer to assume the loan without the lender’s approval, the loan can become immediately due and payable. You’ll have to pay off the loan quickly, and the buyer will not be held responsible for the loan.
Complete The Home Sale
The assumption is complete and you are officially released from the loan. Collect the remaining balance from the buyer, which, again, is the asking price less the assumed loan amount. Congratulations, you just leveraged your assumable FHA loan to sell your home more easily and with a bigger price tag.
FHA Assumable Loan FAQ
Are other loan types assumable?
Under certain conditions, USDA and VA loans are assumable as well.
Do assumptions require an appraisal?
No. The lender does not need to re-evaluate the property’s value or condition, according to HUD guidelines. This saves the buyer time and money.
How much do assumptions cost?
The servicer may charge the buyer an assumption processing fee of up to $900 plus reasonable fees for hard costs such as credit reports. Still, an assumption is much less expensive for the buyer than a new loan, which can cost 1-2% of the loan amount in lender fees alone.
Are All FHA Loans Assumable?
Nearly all FHA loans are assumable. According to FHA guidelines, “The Mortgagee [lender or servicer] must not impose, agree to, or enforce legal restrictions on conveyances or assumptions” unless specifically authorized by HUD, or if the seller obtained secondary financing after receiving the FHA loan.
Leverage Your Low-Rate FHA Loan To The Fullest
If you have to sell your home, don’t let your low FHA rate go to waste. Consult a real estate agent about leveraging it to sell your home for the most possible money.
Tim Lucas spent 11 years in the mortgage industry and now leverages that real-world knowledge to give consumers reliable, actionable advice. Tim has been featured in national publications such as Time, U.S. News, MSN, The Mortgage Reports, My Mortgage Insider, and more.