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Let Them Assume

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Posted On: 09/12/2012

QUESTION:

If I get an FHA mortgage, is it assumable, and how is that an advantage?

ANSWER:

Since the late 1980s, FHA loans have allowed for “qualified” assumptions. That means they can be assumed by qualified non-investor buyers. Lender fees for an FHA assumption are limited to $500.

About 9,400 FHA loans were assumed in 2011, roughly four times as many as in 2007. Looking toward the future, it’s likely that the assumption feature will become more valuable and that we’ll see more FHA assumptions. Here’s why:

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As this is written, mortgage rates are at historic lows, well below 4 percent. Now imagine a future where interest rates are higher, say 7 percent, and you want to sell your home. If a buyer can assume your loan, you have a substantial marketplace advantage when compared with properties where buyers will need new financing at then-current rates – rates that are substantially above 4 percent.

For details, speak with local lenders.

QUESTION:

When refinancing a single-family investment property, the lender charged us for both an appraisal and a comparable rent schedule. Why do they need a rent schedule?

ANSWER:

Francois K. Gregoire, an appraiser based in St. Petersburg, Fla., says, “Depending on the underwriter and lender, they may raise questions if the borrower’s claimed rental income varies significantly from the estimate of market rent developed by the appraiser.”

If you compare the gross rent claimed with the borrower’s tax return and the gross rent claimed with a loan application, they should be the same.

The monthly rent should be within reason for the neighborhood. A rent that is too high may suggest future vacancies because a smart tenant will look for an alternative residence at lower cost. A rent that is too low might explain a long-term tenancy, no vacancies and steady rental income. In a sense, the better rental property may actually be the one where rental income has not been maximized, but has rents that are stable and enduring.

Peter G. Miller is the author of The Common-Sense Mortgage and a veteran real estate columnist. Have a question? Please write to peter@ctwfeatures.com.

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