Understanding Assumable Mortgages: Benefits and Challenges in 2024

0:08) Well, hello, World Wide Web. You have found your way to the Texas Real Estate and Finance (0:13) podcast and I am Mike Mills, a North Texas mortgage banker with Geneva Financial. And (0:19) this is your real estate market update for the week of July the 9th.

I hope everyone had (0:23) a fantastic 4th of July celebrating America. And if you were able to throw it in reverse, (0:28) Terry, you got all your fingers and toes and you made it back to the workweek ready to hot (0:33) to a on your business and get that thing in full gear ready for the summer. I probably (0:37) spent too much time on the internet this week looking at reels and relaxing on the lake.

(0:40) But now it's time to get you guys up to date with what's happening in and around the world (0:44) of real estate as we head into the home stretch of the summer buying season. So thank you for (0:49) tuning in and joining me in our quest to defeat Medicare pause. Sorry, I'm full of jokes today.

(0:59) Saw that debate. It's crazy, but here's the world we're in. But I'm just fired up to be (1:03) back in business.

So let's get this show on the road. But speaking of business, please (1:07) don't forget when I'm not making you groan with my stupid dad jokes, I'm helping your (1:12) clients get pre-approved to find the home of their dreams. Today's market can be really (1:16) challenging to navigate and you need someone on your team to help your buyers understand (1:20) why buying real estate is still one of the best investments that you can make.

So let (1:23) me be your ally in helping those hesitant buyers and sellers understand why yesterday (1:29) was still the best time to buy a home. But the second best time to buy is right now. (1:34) My team and I take an educational approach to help your clients understand what buying (1:38) in this market is like and how it can still be the best way to build wealth for (1:42) the future.

We're here to be your biggest supporter in this market that is changing (1:45) on us every day. So send us those referrals so we can help you get eight more after that. (1:50) Give us a call.

You'll be glad you did. Oh, and if you find today's episode helps you (1:54) expand your already expert knowledge base, even just a little, then do this Texas (1:58) native a solid and share it with a friend. Your support helps us grow our reach (2:02) across this great state and find more and more hardworking real estate professionals (2:06) just like you.

So like our show, drop us a comment, or if you want a t-shirt, (2:12) leave us a review. I'm starting to put some swag together and I'd love to send (2:16) you a first edition Texas real estate and finance podcast t-shirt. If you love (2:20) soft daily wear shirts, drop us a review and I'll send one out to you right away.

(2:24) Now what's on the docket for today's fun filled episode? Mortgage rates lead (2:27) us off as always. 7% is holding fast, but we might get a six in front of that (2:33) rate very soon. I'll tell you why.

The market's crashing, inventory is (2:37) skyrocketing, or at least that's what some new sources would lead you to (2:41) I'll show you why that has some truth to it, but not what the headlines say. (2:45) Of course we have some quick hits from around the real estate landscape. The (2:48) real estate portal wars are heating up and we'll spill the tea on the latest (2:52) lawsuit in this never ending drama.

I'll share some new numbers on how (2:56) affordable housing is becoming more and more like Sasquatch. You heard it (2:59) once existed, but don't see any evidence of it hardly anymore. And I'll (3:03) share with you just another reason why there's probably not a lot of relief (3:07) in sight when it comes to your home insurance premiums.

And for our main (3:10) topic today, I'm going to tell you about a loan program that's available to (3:14) millions of Americans right now, has rates under 4%, but is often (3:19) misunderstood. Sounds too good to be true? Well, I'll give you the details (3:22) at the end. Now, first up as always is the question that I hear (3:25) every day of my life.

Hey Mike, what are the rates? Well, (3:28) although we've had lots of recent data showing a weakening economy and (3:32) when the economy weakens, we typically start to see rates improve. (3:35) And they have, but not as much as we would expect. That 7% (3:39) mark is being as stubborn as the women's Olympic basketball selection (3:42) committee.

They all know that they need to add Caitlin Clark to that team. Now, (3:45) according to Mortgage News Daily, as of July 9th, the average interest rate for (3:49) a conventional 30-year loan is about 7.01%. The average 30-year FHA (3:54) rate is about 6.48%. The average 30-year VA rate is 6.5%. The (3:59) average 15-year conventional rate is about 6.41%. And the average 30-year (4:04) jumbo rate is about 7.22%. On Thursday this week, we'll get the (4:08) CPI report for June. And right now, the expectation is that (4:11) CPI will go from 3.3% to 3.2% further easing the rate of inflation.

(4:17) And this would be a great thing for mortgage rates because with (4:19) unemployment ticking up last week to 4.1% and CPI possibly falling this (4:24) week, that could spell another big move for the bond market, which (4:28) could lead to rates finally getting and staying below 7%. So, hold (4:32) under your hats because lower mortgage rates could be on the horizon. (4:35) And if rates do start trending lower, the mortgage application rates could also (4:39) see a bump because believe it or not, we've already started to see a small (4:42) bump in refinances compared to this time last year.

So, last year on (4:46) July 6th, the average mortgage rate was 6.81%. But even with (4:50) higher rates, this year we've seen a 9% increase in refinances. Now, (4:55) it's believed that many of these refinances are cash-out loans that (4:58) people are either taking out in order to pay off debt that's been (5:00) accumulating over the last few years or to improve homes that (5:04) they aren't planning on moving out of. You see, there are many homeowners (5:07) out there that are wanting to move to upgrade their housing situation, (5:10) but because of much higher home prices are unable to get that upgrade (5:14) unless they spend a significant amount more at a significantly higher rate.

(5:18) So, instead, they're electing to add that pool or redo that kitchen or (5:22) bathroom and stay where they are. Yeah, their rates higher, but rates (5:25) fluctuate up and down and they'll most likely have an opportunity to (5:28) refinance again if they need to. But right now, they're still able to get (5:31) the extra amenities that they want without having to move.

You see, (5:35) people have been paying attention are starting to realize that rates (5:37) aren't making any big moves anytime soon. And even if the Fed does (5:41) decide to start cutting rates this year, which is likely, it isn't (5:44) going to move the needle that much. And this climb down to lower (5:47) rates is going to take years unless there's a significant (5:50) economic downturn.

And that is still a possibility. But without that, (5:53) we're going to be in this 6% to 7% range for quite a while. And (5:57) home prices are going to continue to climb, maybe at a (6:00) slower rate, but not falling off dramatically anytime soon.

So, (6:04) if you've got clients on the fence, encourage them to make (6:06) decisions on their situation and not the market because right now (6:10) there's just too many unknowns. There could be some price (6:13) declines, but not significant ones. And oh, by the way, if (6:15) there were significant moves, it would more likely be in the (6:18) direction of higher prices because as my broken record has (6:21) been saying for quite a while now, we still don't have enough (6:24) inventory to get any dramatic price drops anytime soon.

So, (6:28) encourage your clients to buy the house for the neighborhood (6:30) and the situation, not because they think rates or prices are (6:34) going to go up or down because five years after they buy their (6:36) home, the price and the rate won't really matter that much. (6:39) But where they live and the house that they come home to (6:42) each day will. Okay.

Now, what is the market actually (6:45) doing and where are we trending these days? Well, right (6:48) now, we're halfway through 2024. And the good news for (6:51) housing at least is we are recovering from historic (6:53) inventory lows. Inventory is improving and that's why we're (6:56) starting to see in some markets, home prices slow their growth.

(7:00) You see, in March of 2022, we only had 240,000 active single (7:05) family homes available for sale across the country. But (7:07) currently, we have 652,000 single family homes available (7:12) for purchase. However, that isn't close to the market (7:15) average for inventory.

It's way better than it was in (7:17) 2022, though, when we saw values appreciating at 25 to (7:21) 30% a year. But there are some trends showing a slowing of (7:24) this growth. For example, we added only 6,800 new (7:27) listings to the market just this week.

Whereas last week, we (7:30) added almost 11,000 new listings. But last year at (7:33) this time, inventory shrunk by 500 listings to 466,000. So (7:38) again, better overall listings this year, but showing some (7:41) signs of slowing down.

And remember, in 2015, at this (7:44) same time, we had over 1.1 million homes available for (7:48) sale. And today, we're at half that number. Again, (7:50) improving, but we're still not where we need to be (7:53) to bring prices down of any significance.

This is also the (7:56) typical seasonal peak for new listings. Because August is (7:59) when we start to see listings declining and fewer homes (8:02) coming available for sale until we start peaking again (8:05) in May of next year. Now, the higher inventory has been a (8:08) welcome sight for home buyers, but it will start to (8:11) decline as we get deeper into 2024.

So, are we seeing more (8:14) price cuts with this higher inventory? Well, yes and no. (8:17) Price cut percentages are higher this year than they (8:19) have been for the last two years. Right now, we're at (8:21) 38% price cuts as compared to 33% in 2023 and 32% in (8:27) 2022.

But it's still not too much above the market (8:29) average, which is over a third of all homes in any (8:32) given year are typically taking price cuts. So, same (8:35) thing. Better, but not substantial.

Now, with more (8:38) inventory, we have also seen an improvement in demand, (8:41) meaning more people who are selling are also buying. (8:44) But the growth has been minimal. We have trended (8:46) above 2023 so far in pending contracts, but just (8:49) barely.

And we're starting to wind down that (8:51) improvement as we head into the fall. So far, we've (8:54) seen just about 3% growth in pending contracts, but it (8:57) is starting to level off. You see, this week was (8:58) basically flat in pending contracts compared to last (9:01) year at the same time.

So, that's the national (9:03) numbers. But what about here in North Texas? Well, (9:05) for the second week in a row, the median home price (9:08) was down about 2% to $400,679. But remember, (9:13) median is a mix of sales.

So, not necessarily (9:16) prices. It could be that lower priced homes are (9:19) selling at a greater rate than higher priced homes. (9:22) But either way, it's still coming down.

New (9:24) listings were also down. Now, it is hard to get (9:26) exact data in real time from week to week, but (9:29) overall for the month, we're down about 10% (9:31) compared to this time last year. Now, the (9:33) average days on market has jumped to about 24 (9:36) days on average, which is up 32% compared to (9:39) this time last year.

And the months of supply is (9:41) up to three and a half months, which is a 60% (9:44) jump from this time last year. Now, while that is (9:47) significant, it's all perspective. We were at a (9:49) terribly unhealthy inventory level even just (9:52) last year.

And now, we're just in a somewhat (9:54) unhealthy level. Remember, six to seven (9:57) months of inventory is required for a healthy, (10:00) balanced housing market. And we're still a good (10:02) ways away from that.

We still have about 17% (10:04) of homes that are selling above list price (10:07) and about 37% of homes that are taking price (10:09) cuts, which isn't really too far off the (10:11) average over the last 10 years. So, the (10:13) basic theme of everything that I just (10:15) talked about here is we are seeing (10:16) improvement to home prices and inventory, (10:19) but not substantial and not enough to (10:21) clause back to a level of affordability (10:23) that allows the average person to be (10:26) able to purchase a home today. It's still (10:27) very expensive.

And even though it's (10:29) improving, it's still not enough to put (10:31) a dent in this incredibly (10:33) unaffordable market. And if rates do (10:35) change at any significant level in the (10:37) positive direction, (10:38) meaning they come down a little bit, (10:40) then these numbers are all going to flip (10:41) back to much higher prices (10:43) and much lower inventory just like that. (10:45) Okay.

So, what are some of the big stories (10:47) that you need to know about that you (10:48) might have missed while you were out (10:49) there selling this week? Well, it's (10:51) getting really nasty in the world of (10:52) online real estate portals. So, (10:54) realtor.com's parent company, (10:56) MOVE Inc. is suing COSTAR, owner of (10:58) homes.com, for stealing (11:00) its trade secrets.

So, this lawsuit (11:02) alleges that James Kaminski, who left (11:05) realtor.com for COSTAR, (11:06) quote, secretly exfiltrated MOVE's (11:10) trade secrets inspired on MOVE's (11:12) real-time confidential electronic (11:14) documents to give COSTAR a massive (11:17) unfair competitive advantage. Now, this (11:19) theft is part of the reason the (11:21) lawsuit claims for homes.com's rapid (11:23) growth. Now, the documents that MOVE (11:25) claims that Kaminski (11:26) accessed include information about (11:28) content planned for realtor.com, (11:30) ideas for future stories, metrics (11:32) showing user traffic, (11:34) a list of contacts, (11:35) lists of realtor.com's employees and (11:37) their compensation, and other private (11:39) business information.

Andy Florence, (11:41) the CEO of the COSTAR group, (11:43) called the trade secret lawsuit a PR (11:45) stunt motivated by the listing (11:47) platform's recent struggles, which, (11:49) by COSTAR's metrics, have caused the (11:51) firm to fall behind Zillow and (11:53) homes.com and the so-called (11:54) Portal Wars. The numbers are clear. (11:56) The numbers are verified.

We have (11:58) 156 million unique monthly visits (12:01) for our homes' network, and they (12:03) have 72 million. So, we're about (12:05) 84 million ahead of them and (12:07) monthly visitors, and that is a (12:09) nine-alarm fire for them. This is (12:11) a big problem, Florence said in (12:12) his statement.

So, Zillow, (12:14) realtor.com, and homes.com are all (12:16) trying to figure out who's going (12:17) to be the national MLS, and now (12:20) they're using the courts to hash (12:22) it out. You got your money on. (12:23) All right, next up, according to (12:25) ReVenture Consulting, the median (12:27) new mortgage payment requires about (12:29) 41.4% of the median U.S. (12:33) To put this in perspective, even (12:35) at the peak of the 2008 financial (12:37) crisis, this particular metric topped (12:40) out at 39.3%. So, on a post-tax (12:43) basis, new home buyers are spending (12:45) over half of their annual income (12:48) on mortgage payments.

Even renting (12:50) a home now costs 30% of the median (12:53) household income in the U.S. So, (12:55) renting isn't that much better (12:56) either. And the last time housing (12:58) affordability was this bad, (13:00) interest rates were nearly 20%. So, (13:01) right now, simply having a place (13:03) to live is becoming very much a (13:05) luxury.

And if home buyers are (13:07) spending half of their income on (13:08) their mortgage, what about (13:10) everything else? Because right now, (13:11) the median car payment is nearly (13:13) $800 a month, and food (13:15) affordability is at record lows. (13:17) Now, my question is, why isn't (13:18) this at the top of every (13:20) politician running for office's (13:21) platform right now? Whether it be (13:23) President, House of (13:24) Representatives, or Senate, any (13:26) person running against an (13:27) incumbent should have this as (13:29) their number one talking point. (13:31) Yet, you barely hear it mentioned.

(13:33) The reason, at least in my opinion, (13:34) is that this isn't a (13:36) red versus blue issue. This is a (13:37) haves versus have-nots issue. (13:39) And the haves don't care about (13:41) the have-nots, and in fact, (13:43) prefer that there are more of (13:45) the have-nots.

Your dollar is (13:46) losing more and more value (13:47) every single day, and as they (13:49) keep telling us, you will own (13:50) nothing and you'll be happy. (13:52) So, my question to you is, (13:54) are you happy? 2024 is shaping (13:56) up to be a year we may not (13:58) soon forget. I just hope that we (13:59) can figure all of this out (14:01) before everything boils over, (14:02) because right now there's lots (14:03) of pissed off people out there, (14:05) and it doesn't seem like those (14:06) in charge seem to really (14:08) give a damn about that.

(14:09) Speaking of being pissed off, (14:11) insurance in Texas is up almost (14:13) 60% in the last five years, (14:15) and this year might cause it (14:17) to go up even more. (14:18) So, the 2024 hurricane season (14:20) is off to an unusually (14:21) early start. Hurricane barrel, (14:23) which right now is causing (14:24) havoc on the Texas coastline.

(14:25) I hope all of our friends (14:26) down there are staying safe (14:27) at this crazy time right now, (14:29) but it's the first category (14:30) for hurricane to form (14:31) in the month of June. (14:33) Now, once it hit the coastline, (14:34) it was only in category one, (14:35) but the category four (14:37) had formed out in the Gulf, (14:38) and this turned into (14:39) a category four around (14:40) June to the 28th. (14:41) Now, the previous record (14:42) was Hurricane Dennis, (14:43) which became a category (14:44) for hurricane on July 8th of 2005.

(14:47) And if you remember, (14:48) 2005 was the same year (14:50) that Hurricane Katrina (14:51) struck the Gulf Coast, (14:52) becoming the strongest hurricane (14:54) ever recorded in the Gulf Coast (14:56) and was one of the most (14:58) intense hurricanes on record (14:59) at that time, (15:00) only to be surpassed (15:01) by Hurricane Rita and Wilma (15:03) that also happened (15:04) that exact same year. (15:06) 2005 was one of the most (15:07) active and destructive (15:09) hurricane seasons (15:09) in modern history. (15:11) 2005 was also the hottest year (15:13) on record (15:13) for ocean temperatures (15:15) in the Atlantic, (15:16) only to be surpassed (15:17) by guess what? (15:18) This year, 2024, (15:20) and by a pretty substantial margin.

(15:22) Now, I'm not going to go (15:23) through all the stats (15:23) on the temperatures. (15:24) You can look that up for yourself. (15:25) And I'm also not going to explain (15:27) that La Nina, (15:28) which is also developing, (15:29) is a cooling of the Pacific (15:30) that reduces (15:31) these storm-busting (15:33) Atlantic wind shears (15:34) that typically keep (15:35) those hurricanes in check.

(15:36) But if you live (15:37) on the Atlantic Coast (15:38) or anywhere near (15:39) the Gulf of Mexico, (15:40) you're hoping (15:40) that your already historically (15:41) high insurance rates (15:42) are going to start to decline (15:44) or really just (15:45) that you want to keep (15:45) your property (15:46) and your family safe. (15:47) But this year is shaping (15:48) up to be a hurricane season (15:50) that we've never seen before. (15:51) Now, weather changes (15:52) and forecasts adjust, (15:54) but we're already off (15:55) to a really bad start (15:56) and the Texas coastline (15:57) and the cities in its path (15:59) are feeling the pain right now.

(16:00) And right now, at least, (16:01) the expectation is (16:02) that it's only going to get worse. (16:04) Now, I'm not trying (16:04) to fear monger here, (16:05) but I'm just saying (16:07) that everyone needs (16:08) to pay attention to this. (16:09) And if you live in an area (16:10) that could be affected, (16:11) you need especially (16:12) to be paying attention.

(16:13) I hope and pray (16:14) that this does not bear out (16:15) the way that they're predicting. (16:17) But at the ocean temperatures (16:18) and early intensity (16:20) of these first hurricanes (16:21) of the season (16:22) or any indication (16:23) of what's to come, (16:24) then we all better (16:25) hold on tight (16:26) for what could be (16:27) an unprecedented weather year (16:29) like we've never seen. (16:30) All right, sorry to be a bummer (16:31) there, guys, but I just (16:32) got to bring you this information (16:33) so everybody's aware.

(16:34) Now, for our main topic today, (16:35) let's talk about a home loan (16:36) that's available (16:37) to millions of Americans (16:38) has rates available under 4%, (16:41) but it's very, very misunderstood. (16:43) Yes, I'm talking about (16:44) the mysterious (16:45) a suitable loan. (16:47) So, with rates around 7% (16:48) these days, (16:49) I can't tell you (16:49) how often I get asked (16:51) about a suitable loans.

(16:52) They want to know (16:53) how they work (16:54) and how you can get (16:55) a borrower to qualify for. (16:56) And you would think (16:56) with millions of people (16:58) having FHA and VA loans (16:59) under 4% (17:01) on their current home, (17:02) that this often misunderstood product (17:04) would be way more widely used. (17:06) Well, today, I'm going to demystify (17:08) these widely advertised (17:09) but often unused loans.

(17:11) I'm going to tell you (17:12) how they work, (17:13) how you can advertise them (17:14) for your listing, (17:15) what a borrower must do (17:16) to qualify (17:17) and more importantly, (17:18) why they aren't used as often (17:20) as one would think (17:21) that they should be. (17:22) All right, let's start with (17:23) what is an assumable loan? (17:24) So, first off, the only loans (17:26) that are available to be assumed (17:27) are FHA and VA loans. (17:29) So, if your seller (17:30) has a conventional loan (17:31) on a property (17:32) that they're trying to sell, (17:33) this is not going to be an option.

(17:34) It can only be used (17:35) by someone currently carrying (17:37) an FHA or a VA loan. (17:39) Second, these loans (17:40) can only be originated (17:42) and approved by the bank (17:44) that currently holds (17:45) and services that loan. (17:47) So, if your buyer wants (17:48) to use your preferred lender (17:49) to do their mortgage, (17:51) but Chase Bank (17:52) has the FHA or VA loan (17:54) for the seller currently, (17:55) in that case, only Chase (17:57) can originate (17:57) and approve that assumable loan.

(17:59) So, the idea (18:00) on this assumable loan (18:01) is that the seller offers (18:02) this VA or FHA loan (18:04) to the buyer (18:05) at their current low rate (18:07) and payment. (18:08) So, if the seller has a VA loan (18:10) and their rate say (18:10) is two and a half percent, (18:12) the buyer could have the option (18:14) to take over that loan (18:15) with the rate, payment, and term (18:17) of the seller's current loan (18:19) upon approval (18:20) by the servicing bank. (18:21) So, the buyer could take over (18:22) the loan at the same terms (18:23) that the seller had (18:24) when they originally (18:25) got their loan.

(18:25) Now, technically, (18:26) anyone who meets the requirements (18:27) for an FHA or VA loan (18:29) can take over (18:30) and assume these loans. (18:31) And even if you aren't (18:32) an eligible veteran, (18:34) you can take over a VA loan (18:35) and assume the terms. (18:37) Again, upon the servicing (18:38) bank's approval.

(18:39) Sounds amazing, right? (18:40) So, if this option (18:41) of taking over a 2% loan (18:43) with a low payment (18:44) and typical qualifying terms (18:46) is out there (18:46) and available (18:47) and frankly has been (18:48) for decades, (18:49) why in the hell don't (18:50) more people take advantage (18:51) of this and do it all the time? (18:53) Well, here's where (18:54) I burst bubbles. (18:55) Sorry, but I don't sell (18:56) sunshine and roses. (18:57) I give you reality (18:58) so you can know exactly (18:59) what you can (19:00) and cannot do (19:01) because that's the only way (19:03) that you're going to be (19:03) best equipped (19:04) to help your buyers (19:05) and sellers (19:06) navigate this process.

(19:07) Alright, let's start (19:08) with problem number one. (19:09) This is often (19:09) the biggest hurdle (19:10) that most people deal with. (19:11) Alright, so let's say (19:12) that the home you're selling (19:13) is priced at $400,000 (19:15) and your seller (19:16) currently owes $200,000 (19:19) on their current (19:20) FHA loan.

(19:21) In order for your seller (19:22) to allow the buyer (19:23) to assume that $200,000 loan (19:25) but still get (19:26) the $400,000 purchase price (19:28) they're looking for, (19:29) the buyer is going to have (19:30) to come up (19:31) with an additional $200,000 (19:33) to make up the difference (19:34) between the loan (19:35) and the sales price. (19:36) And in almost all cases, (19:38) this is going to have (19:39) to be done with cash (19:40) and that is a major hurdle (19:42) for most buyers, (19:43) especially these days. (19:44) Now, if you just google this (19:45) and look up (19:45) if you can obtain (19:46) a second loan (19:47) to make up this difference, (19:48) the internet's going to (19:49) often tell you (19:50) that you can.

(19:50) However, the reality (19:51) is that you have (19:52) two issues (19:53) with secondary financing. (19:54) Number one, (19:55) there are very few, (19:56) if any, banks (19:57) that will offer (19:58) any type of secondary financing (20:00) on a home (20:01) that you're trying to buy. (20:02) Trust me, I look.

(20:03) Home equity loans, (20:04) HELOCs, second liens, (20:06) all these types of loans (20:07) often require (20:08) that you already (20:08) own the home (20:09) in order to obtain them. (20:10) And if you can find a bank (20:11) that'll allow you (20:12) to get a second lien (20:13) to make up the difference, (20:14) then you run into (20:15) problem number two, (20:16) which is that the bank (20:17) that currently holds the loan (20:18) and must be the one (20:19) to approve the new borrower (20:21) more often than not (20:22) will not allow (20:23) for this secondary financing (20:24) to be used (20:26) in the assumption process. (20:27) Now, you may ask, (20:28) why in the world (20:29) would they care? (20:29) They get to keep the loan (20:30) and keep getting (20:31) the interest paid, right? (20:33) Well, yes, that is true.

(20:34) But you forget, (20:35) banks like money (20:37) and assumeable loans (20:38) have limitations (20:39) on what can be charged (20:40) to actually go (20:41) through the process (20:42) of doing the loan. (20:42) For example, (20:43) a VA loan (20:44) will not allow (20:45) a borrower to be charged (20:46) more than $300 (20:47) to assume that loan. (20:48) And although the servicing (20:49) banks are following (20:50) the guidelines for FHA (20:51) and VA loans (20:52) as it pertains to like (20:53) credit and debt to income, (20:55) they are permitted (20:56) to place their own overlays, (20:58) which are just (20:58) additional conditions (20:59) on these loans (21:00) when they elect to do them.

(21:01) So, they can require (21:02) higher credit scores (21:03) than a standard purchase (21:04) or more cash reserves (21:05) or lower debt to income (21:07) or really whatever they want. (21:08) Like, for example, (21:09) not allowing this loan (21:10) to have a second lien, (21:11) which almost all of them (21:12) do not. (21:13) Because if they don't have to, (21:15) why would they not (21:15) just originate another loan (21:17) at a higher cost (21:17) to the borrower? (21:18) They get to get higher rates (21:19) and higher margins (21:20) to make more money (21:21) versus an assumption (21:22) that nets them next to nothing.

(21:23) So, more often than not, (21:25) the servicing banks (21:25) make this process (21:26) next to impossible to complete. (21:28) And so, when a buyer (21:29) becomes frustrated (21:30) with all the limitations (21:31) and restrictions, (21:32) they just elect (21:32) to take out a new loan. (21:34) And at that point, (21:34) since the servicing bank (21:35) that's going through (21:36) this process with the buyer (21:37) already has all their information, (21:39) all their documents, (21:40) the appraisal, (21:41) and all the things (21:41) that go along (21:42) with doing the loan, (21:42) then it's really easy (21:43) just to switch them over (21:44) to a new FHA, (21:45) VA, or conventional loan (21:46) right there (21:47) with the same bank.

(21:48) Now, that's the issue (21:48) with secondary financing, (21:50) but let's assume (21:50) that you have a buyer (21:51) that has the cash (21:52) to make it happen. (21:53) They've got enough money (21:54) in the bank to put down (21:55) to make up the difference (21:56) and take over that 3% loan. (21:57) Well, problem number one (21:58) with that scenario (21:58) is that if the assumable loan (22:00) is a VA loan, (22:01) and if the borrower (22:02) assuming the loan (22:03) is not a veteran, (22:04) then they can assume it, (22:05) but the current veteran (22:07) will have their entitlement (22:09) held up in that loan (22:10) until it's either (22:11) fully paid off or refinanced, (22:13) which could limit (22:14) your seller's ability (22:15) to obtain another VA loan (22:16) when they go to purchase (22:17) their next house.

(22:18) Now, maybe not (22:19) if the purchase prices (22:20) on both properties (22:21) are low enough (22:22) and they have enough (22:23) entitlement left, (22:24) but in that situation, (22:25) what's the real benefit (22:26) to the seller (22:27) to give that loan (22:27) over to the buyer, (22:28) unless in that case, (22:30) they're just desperate (22:31) to get the household. (22:31) And if the buyer (22:32) is a veteran, (22:33) then they could have (22:34) their entitlement switched, (22:35) but the VA has to approve that (22:37) and it could take (22:38) quite a long time (22:39) for those things to get done. (22:40) You and I both know (22:41) how fast the government (22:42) agencies move.

(22:43) And again, (22:44) what is the true benefit (22:45) to the seller (22:46) if they're going to have (22:47) to wait months (22:48) for that loan to be approved? (22:50) Plus, again, (22:51) the servicing bank (22:52) must approve this scenario (22:54) and this buyer (22:55) and honestly, (22:56) they don't have to (22:57) if they don't want to. (22:58) Now, with an FHA (22:59) assumable loan, (23:00) which by the way (23:00) is most often (23:01) the loan that is assumed, (23:03) the main hurdle (23:03) is of course the cash (23:04) like I mentioned before, (23:05) but also FHA requires (23:07) that you pay mortgage insurance (23:08) for the life of the loan. (23:09) So you have a buyer (23:10) that has $200,000 in cash (23:12) to put down, (23:13) but are now going to be forced (23:14) to pay mortgage insurance (23:15) on an FHA loan (23:17) when they could get (23:18) a conventional loan (23:19) with no MI (23:19) because again, (23:20) they're taking over (23:21) the current terms (23:22) that the seller had.

(23:23) Now, the difference (23:23) in the payment (23:24) between a 7% (23:25) conventional loan (23:26) without MI (23:27) versus a 3% (23:28) conventional loan (23:29) with MI (23:30) might make sense. (23:31) This is why (23:32) this type of assumption (23:33) is most often used. (23:34) But like I've said (23:35) many times (23:36) in this explanation, (23:37) the servicing bank (23:38) has to approve (23:39) all of this (23:40) and can take (23:41) its sweet ass time (23:42) in doing so (23:43) and may end up saying no (23:44) for whatever reason they decide.

(23:45) So your buyer (23:46) and seller (23:47) could spend months (23:48) trying to make (23:48) this transaction happen (23:49) and still not get it closed. (23:51) Then as an agent, (23:52) you have a pissed off buyer (23:53) or a pissed off seller (23:54) who more often than not (23:55) just wants to throw (23:56) their hands up (23:57) and move on. (23:58) And it wasn't your fault, (23:59) but how are they going to feel (24:00) about that entire experience? (24:02) And when they decide (24:02) to buy or sell their next house, (24:04) are they going to think of you (24:06) when it comes time to do it? (24:07) Again, it wasn't your fault, (24:09) but people remember (24:10) how they felt, (24:11) not who was responsible for it.

(24:13) So it's not exactly (24:14) the best path to go (24:15) if you want to get (24:16) those eight more referrals. (24:17) So just to wrap all this up, (24:18) Assumable loans (24:19) can be a very attractive feature (24:21) to put in your listing (24:23) that's having a hard time (24:24) getting an offer (24:25) from prospective buyers these days. (24:27) But all the stars (24:28) have to align to make them work (24:30) and more often than not, (24:31) they don't.

(24:32) And everyone walks away (24:33) just being pissed off (24:34) about the entire process. (24:35) And really, (24:36) the only real benefit (24:37) is to the buyer (24:38) and they need the cash (24:39) to pull it off. (24:40) The seller's only real benefit (24:41) is moving a house (24:42) that otherwise (24:43) is sitting on the market (24:44) for too long.

(24:45) Because if that's not the case, (24:47) why wouldn't they just take (24:48) an easier to close offer (24:49) from a buyer (24:50) that can obtain their own (24:51) separate finance? (24:52) You often hear people (24:53) advertise and talk about (24:54) how awesome (24:55) Assumable loans are (24:56) and how you can use them (24:57) to get low rates (24:58) in great terms. (24:59) But once you understand (25:00) the process, (25:01) you know that this is (25:02) a very hard thing to accomplish. (25:03) And an often unrealistic loan (25:05) to get closed (25:06) and keep everyone happy (25:07) with the transaction.

(25:08) So Assumable loans (25:09) can be a great option (25:10) and they do get done, (25:12) but only under (25:13) very specific circumstances (25:15) and only if all parties (25:17) are good with moving (25:18) through a process (25:19) with a servicing bank (25:20) that often makes it (25:21) almost impossible (25:22) to get closed on time (25:24) or at all. (25:25) So, buyer and seller beware. (25:28) Well friends, (25:29) that is all for today.

(25:30) I hope you got (25:31) some helpful nuggets (25:32) from today's episode (25:32) that'll help you (25:33) better help your clients (25:35) navigate this real estate landscape (25:37) that changes on us (25:37) almost every day. (25:38) We're all in this thing together. (25:39) And if I can provide (25:40) even just one little piece (25:42) of your arsenal of knowledge (25:43) then I've done my job.

(25:45) I hope you all have a great week (25:46) and look forward to seeing you (25:47) back again (25:47) same time next week. (25:49) But until then, (25:50) be great humans (25:50) and keep grinding (25:51) because life is what you make it. (25:53) So make it great.

(25:55) Adios.