I'm Assuming You Want A Lower Interest Rate, Right?

Mark and Sharon Fowler of Charlotte, N.C. are simultaneously planning a home purchase and resale strategy.

Mark Fowler, chief revenue officer and vice president of production for Residential Finance Corp. in Charlotte, says he and his wife will use FHA financing to purchase their home even though they are making a down payment of more than 20 percent and could easily qualify for conventional financing.

Why? The Fowlers are using the "assumable" status of an FHA mortgage as a future marketing tool to lure potential homebuyers when they decide to sell sometime down the line.

Assumable loans

An assumable loan is a mortgage that the seller transfers to the buyer without any change to the loan terms or interest rate. Buyers save on both the lower interest rate and lender fees, says Paul Defngin, a senior mortgage banker with Apex Home Loans in Rockville, Md.

"Conventional wisdom says that we're near the bottom for interest rates and that most people stay in their homes for five to seven years," says Fowler. "If you think interest rates in five to seven years will be six percent or higher, then offering buyers at that time an assumable FHA loan at, say, 3.39 percent should be a big selling point. It's conceivable to get a $25,000 premium on the sales price depending on how high interest rates are at that time."

Here's how it works

FHA loans are fully assumable, but buyers must qualify for the loan according to FHA and lender guidelines, says Sue Pullen, regional vice president for Fairway Independent Mortgage in Tucson, Ariz. Borrowers would need to provide full documentation of their income and assets and have a high enough credit score and low enough debt-to-income ratio to qualify for a regular FHA loan.

Let's say the original mortgage was for $300,000 and the balance is down to $200,000 when you've decided to sell. The buyer assumes the remaining balance on your loan and must come up with $100,000 in cash to reach the original loan balance.