Homebuyers who want a low rate can assume the sellers’ FHA mortgage

FHA mortgages have always been assumable to qualified buyers.

By JEFF LAZERSON | jlazerson@mortgagegrader.com | MortgageGrader.com | March 29, 2023

Article originally posted in Orange County Register on March 23, 2023.

I thank my late father for talking me into this.

In 1978, my dad, another person and I cobbled together $10,000 to buy a four-bedroom home for $68,000. We rented out two bedrooms while occupying the other two bedrooms, making the house payments much more affordable.

Along came the 1980s inflation and higher home prices. We did a cash-out refinance as home values more than doubled. We were swimming in equity.

A very smart real estate agent, Pat Curtin, talked one of my brothers and me into buying a different home, partly by assuming the sellers’ cheap existing Federal Housing Administration mortgage and getting a second loan to close the equity gap (the difference between the sales price and the first mortgage).

While I don’t remember exactly, it went something like this: We paid $95,000. Our down payment was $15,000. We assumed an FHA 8.5% fixed rate with a $63,000 remaining balance. We took out a $17,000, 12% fixed-rate second mortgage to close the gap. Industry parlance calls this a “piggyback second”. I think we paid 8 points or $1,360 (1 point is 1% of the loan amount).

Institutional mortgage rates were roughly 13% back in the day. Our total payments for the 8.5% and 12% were cheaper than any new loan offerings.

(Please note that FHA assumptions only work for primary residences and not investment properties.)

FHA mortgages have always been assumable to qualified buyers. But why take on an assumable FHA mortgage if a new mortgage is cheaper, and arguably easier to get? Hence, there’s been no practical need to assume an FHA mortgage for decades.

Today, we’re looking in the low-rate rearview mirror.

With a keen eye on low-to-moderate income borrowers, this is a great financing tool to capture these once-in-a-lifetime low mortgage rates.

And, those starter home folks perhaps get a premium price because they are able to hand over cheap mortgages. It might just make it easier for those sellers to move up to the next level, largely to meet the needs of growing families.

“Mortgage rates are going to be somewhat higher,” said Ted Tozer, former Ginnie Mae president in the Obama administration and current nonresident fellow at the Urban Institute. “Rates will be in the 6 to 7% range for the next 10 years. We’re getting back to normal after the Fed pumped money in during the Great Recession.”

Tozer pointed out mortgage rates had been dropping for 40 years.

The 30-year conventional mortgage rates peaked at 18.63% on Oct. 9, 1981, according to Freddie Mac archives. The all-time Freddie low was 2.65% on Jan. 7, 2021. (FHA rates run about one-half point lower than conventional rates). This week the Freddie rate is 6.42%. Freddie Mac has been tracking conventional rates since 1971.

Tozer explained the challenge today for homebuyers and home sellers is a $900 assumption fee mortgage lenders/servicers may charge the buyer for the qualifying and onboarding procedures.

Even accounting for the $900 assumption fee (or a $300 VA assumption fee) charged to the borrower, lenders reported losses between $1,220 and $2,830 per assumption, according to a survey by the Mortgage Bankers Association.

“Lenders are going to drag their feet,” said Tozer.

The FHA said it’s reviewing its loan assumption policies, an agency spokesperson told me via email.

To be clear, lenders are obligated to process assumption paperwork. So push, if necessary.

Sadly, this might push your loan applications to the back of the line, minus any financial incentives for the brokers. Nobody works for free. If they’re losing money on a deal, talk about a hiatus.

The issue has riled the industry so much, the MBA sent a letter to FHA and VA officials on Dec. 20, 2022, asking the agencies to raise the assumption fee to $3,500.

The other catch for homebuyers is the gap between the sales price and the FHA mortgage balance.

A simple example is the home seller is sitting on an existing FHA mortgage at say 4% (including the monthly mortgage insurance) assuming a $400,000 balance. The seller and buyer agree to a $500,000 sales price. Between the borrower and a piggyback second, they’ll need to cough up $100,000.

Perhaps the buyer comes up with $50,000 and an institutional second with a 9% rate on $50,000. Or maybe the seller will carry back a second for a lot less than 9%.

The good news is so long as the borrower can qualify, the borrower can assume the FHA first. There is no down payment requirement per se. It all depends on covering the gap between the loan balance and sales price.

At the end of February, almost 450,000 of the more than 6.7 million California mortgages are FHA-backed, according to Black Knight. The local breakdown shows Los Angeles County has 70,804, Orange County 10,189, Riverside County 61,391 and San Bernardino County 56,160.

Figure out a way. Think outside the box. Find a Pat Curtin. And, thank you, Dad.

Freddie Mac rate news: The 30-year fixed rate averaged 6.42%, 18 basis points lower than last week. The 15-year fixed rate averaged 5.68%, 22 basis points lower than last week.

The Mortgage Bankers Association reported a 3% mortgage application increase from last week.

Bottom line: Assuming a borrower gets the average 30-year fixed rate on a conforming $726,200 loan, last year’s payment was $907 less than this week’s payment of $4,552.

What I see: Locally, well-qualified borrowers can get the following fixed-rate mortgages with one point: A 30-year FHA at 5.25%, a 15-year conventional at 5.125%, a 30-year conventional at 5.75%, a 15-year conventional high balance at 5.625% ($726,201 to $1,089,300), a 30-year high balance conventional at 6.5% and a jumbo 30-year fixed at 6.5%.

Note: The 30-year FHA conforming loan is limited to loans of $644,000 in the Inland Empire and $726,200 in LA and Orange counties.

Eye catcher loan program of the week: A 30-year FHA fixed rate at 4.875% with 2.25 points cost.

Jeff Lazerson is a mortgage broker. He can be reached at 949-334-2424 or jlazerson@mortgagegrader.com. His website is www.mortgagegrader.com.

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* Specific loan program availability and requirements may vary. Please get in touch with your mortgage advisor for more information.