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Are FHA loans
assumable?
How do you find out if a loan is assumable?
What is a wrap-around loan?
What is a wrap-around loan?
The wrap-around loan
method of seller financing is best described by an example. Suppose
Mr. Sellers currently has a $70,000
mortgage on his home. Mr. Byers makes an offer to purchase the
home for $100,000. Mr. Byers says he can pay $5,000 down if Mr.
Sellers will finance the remaining $95,000.. Mr. Sellers sees
an opportunity to make some money. The interest rate on his current
loan is only 5.5%. The going current market interest rate is 7.5%.
He then offers to carry Mr. Byers' $95,000
mortgage for 8%. Because Mr. Byers' credit history isn't
what it should be, he jumps at the chance to avoid the hassle of
getting a conventional loan.
To protect both of them, they execute a legal "deed of trust" and
properly record it. (Note: this is
the second deed of trust recorded for this property.) Mr.
Byers' $95,000 mortgage "wraps around" Mr.
Sellers' $70,000 mortgage. Mr. Byers moves into the house, and makes
his 8% interest and
principal payment monthly
to Mr. Sellers on the second $95,000 mortgage. Mr. Sellers
continues to make his 5.5% monthly interest and
principal payment to
the original lender on the $70,000 mortgage and pockets the
difference as profit. Everybody's happy. Sound like a win -
win situation? Maybe. Although what Mr. Sellers and Mr. Buyer
have done is perfectly legal, it is not without risk. This
arrangement works as long as Mr. Sellers' original loan agreement
does not contain a "due-on-sale"
clause. Because if there is a due-on-sale or a due-on-transfer
provision the
remaining balance of the underlying loan might be called "due"
when the first lender becomes aware that the property has "sold" and
title has transferred. The
original lender might then invoke their first "deed of trust" and
sell the property for the amount of principal that has not yet been
repaid. Mr. Sellers loses his $95,000 mortgage and Mr. Buyer loses
the house. At the very least, the original lender will
increase the interest-rate and
probably charge a hefty assumption
penalty to Mr. Byers, and possibly a pre-payment penalty
to Mr. Sellers. In either case the situation is now - "lose-lose."
The "wrap-around loan"
can be a useful tool to both buyer and seller if it's applied
correctly and under the right circumstances. But, never, never enter
into it without the help of a competent title attorney to advise you
of the inherent risks and write a contract that protects both your
interests, as well as the seller's.
Are FHA loans assumable?
Lenders will only permit those
FHA loans that have a "subject to
transfer" clause to be taken over through a formal
assumption process. Look to your loan agreement for specific terms. In
addition, you should candidly discuss any risks with your lender,
and possibly consult an attorney before signing the final
agreement.
How do you find out if a loan is assumable?
Look to the loan agreement to determine if it is
assumable by
someone else. Then talk to the lender about specific requirements
based on the value of the home. Assumable loans permit one
borrower to take over a loan from another borrower without any
change in the loan terms. Such loans still exist but they aren't
very common or popular (for buyers) in a low
interest-rate
environment. Plus, today, new assumable loans are almost always
adjustable rate mortgages.
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