Assumable FHA, VA Mortgages

The low interest rates secured by borrowers recently on FHA mortgages may become valuable in a different way in the future. FHA and VA mortgage are assumable at the existing interest rates subject to buyer qualification.

Buyers wanting to assume an existing FHA mortgage must be owner-occupants and meet the current FHA guidelines. Applicants should have a minimum 600 credit score, total debt with house payment to be assumed not to exceed 41% of their monthly gross income and meet other standard income, credit and qualifying requirements.

The benefits are not only assuming a lower interest rate resulting in lower payments but the closing costs on an assumption are much less than originating a new loan. The fact that the mortgage is already into an amortization schedule and that lower interest rate loans amortize faster than higher interest rate loans make it build equity faster than a new mortgage.

When interest rates eventually rise, assumptions will provide an opportunity for buyers to lower their cost of housing significantly while improving their wealth positions.

FHA Fees Going Up April 1st

FHA has raised the annual Mortgage Insurance Premium to 1.25% beginning April 1st.  MIP is required on all FHA loans and used to fund losses by lenders for borrowers who default on their mortgages.  As of June 1st, FHA loans in excess of the standard maximum of $625,500, in high-cost areas, will have a premium of 1.5% of the loan amount.

In addition to the increase in the annual MIP, FHA also announced it plans to raise the fee on the up-front MIP from 1.00% to 1.75%.  No date was reported for its implementation.

The bottom line will result in a borrower’s payments going up.  However, it might not be restricted to the MIP.  Freddie Mac’sPrimary Mortgage Market Survey showed that both 30 year and 15 year mortgages have gone up too.

One way to avoid the increase is to have a completed sales contract and have your lender order the FHA commitment prior to April 1, 2012.  If you plan on buying a home this spring, there is a reason to do it earlier rather than later.