YOUR MORTGAGE : Benefits of Assumable Home Loans : Savings: The interest rate on these often is lower and the processing fees less. Assuming older mortgages may not even require a credit check.
Assumable loans can offer several advantages over new loans. They sometimes carry interest rates much lower than you would get if you took out a new mortgage and you won’t have to pay as much in fees.
In addition, more of the monthly payments on the loan you assume will go toward principal instead of interest.
As we mentioned last week, most adjustable-rate mortgages are assumable. Most fixed-rate loans cannot be assumed, but there are two important exceptions-- loans insured by the Federal Housing Administration or guaranteed by the Veterans Administration.
“If you find a home that’s financed with an FHA or VA loan, you might be looking at a terrific investment opportunity,” said Thomas J. Lucier, a veteran investor and publisher of “Diamonds in the Rough,” a monthly real-estate newsletter.
Lucier said that fees to assume an FHA or VA loan rarely top $500 or $700, a far cry from the thousands of dollars in points and other charges you’ll probably have to pay if you set up a brand-new loan.
The interest rate on many existing FHA and VA loans are much lower than current rates, he added, and you can take over the payments of some of the older loans without even undergoing a check of your credit record.
Unfortunately, rules for assuming FHA loans have been changed several times over the past few years. One of the most important changes concerns investors: You can no longer assume an FHA mortgage if you don’t plan to live in the property yourself.
If you’re buying the home for your own use and want to assume the mortgage, the process you must follow will depend on when the FHA loan was made. Generally, older loans are easier to assume than newer ones.
“You need to look at the seller’s original loan documents to see when the loan was actually closed,” said Forrest Pafenberg, a lending expert with the National Assn. of Realtors. “The closing date will determine how much work you’ll need to do in order to assume the loan.”
FHA loans made before Dec. 1, 1986, are freely assumable. You can take the loan over without undergoing a credit check, as long as you’ll live in the home yourself.
Assumption rules are more complex for loans that were made between Dec. 1, 1986 and Dec. 14, 1989.
If you want to assume one of these loans and the mortgage was made less than a year ago, you’ll have to undergo a credit check and prove to the lender that you’ll be able to handle the monthly payments. If the lender or the FHA isn’t satisfied, either one can reject the assumption.
If the loan was made after Dec. 14, 1989, you have no choice: You must fill out a full credit application and get the blessing of the original lender and the FHA.
“The lender is going to take a good look at your credit record, verify your employment and ask for other types of information,” said Dirk Murphy, an FHA spokesman. “You’ll also probably be called in for a face-to-face interview.”
Rules governing the assumption of VA loans are a bit different. If you’re a veteran of the armed services, you can generally assume a VA loan as long as you get the approval of both the lender and the VA.
If you aren’t a vet but can prove that you’re capable of making the payments, it’s up to the VA’s regional office to decide whether you can assume the loan.
“If the local market is slow or the VA is afraid that the seller might default on his payments, the VA will usually allow you to assume the loan even if you’re not a veteran,” realtor Pafenberg said.
“But if the market is real strong and the seller doesn’t seem likely to fall into foreclosure, your request to assume the loan is probably going to be denied.”
Pafenberg said the VA sometimes offers special financing to vets and non-vets alike willing to purchase its foreclosure property.
Although the VA prefers to deal only with buyers who’ll actually live in the home, the agency sometimes allows assumptions or will offer special financing to investors willing to buy slow-moving houses.
AVERAGE RATES FOR RESIDENTIAL MORTGAGES Average rates for residential mortgages as of Aug. 17, 1990.
Survey Conventional Mortgages Adjustable Mortgages Area 15 Year 30 Year Composite 1 Year Composite National 9.96% 10.29% 10.14% 8.20% 8.48% California 10.21 10.54 10.38 8.41 8.30 Connecticut 10.03 10.35 10.21 8.40 8.57 Wash. D.C. 9.84 10.20 10.04 7.92 8.26 Florida 9.93 10.30 10.13 8.18 8.34 Mass. 10.10 10.40 10.26 8.35 8.67 New Jersey 9.94 10.25 10.12 8.06 8.50 N.Y. Metro 10.14 10.46 10.32 8.40 8.71 New York 10.35 10.62 10.53 8.54 8.87 N.Y. Co-ops 10.20 10.51 10.40 8.55 8.84 Pa. 9.72 10.07 9.90 7.89 8.00 Texas 9.77 10.08 9.93 8.18 8.33
SOURCE: HSH Associates, Butler, N.J.
