Assumable mortgage? How does that even work? 203k?

Question

Hi!

So Ive been banging my head against the wall for months trying to figure out how to obtain my first investment property.

Looking for owner occupied.

If FHA, I understand mortgage may be assumable. Just an example, If property is selling for 200k, seller owes 100k still, what is the process of paying the difference not out of pocket? Can I get a 203k loan to cover the 100k difference and repairs needed? I have never considered looking for a property with potential of an assumable mortgage until now. Thanks

Jeff Copeland · Answer

"Assumable" has nothing to do with the "position" of the mortgage. Some loans are assumable, some are not. This is a characteristic of the loan itself and defined by the lender. As it happens, all FHA loans are generally assumable.

The "position" is simply based on the date the mortgage was recorded, and the liens generally get paid "first in, first out" in the event of a foreclosure.

So let's say the borrower defaults in the scenario above, owing $100k on a first mortgage, and $80k on a second mortgage, then the property sells for $150k at a foreclosure auction. The first position lienholder gets made whole. But after that there's only $50k left over to pay off the second lienholder, who was actually owed $80k. The further down the pecking order you are as a lender, the riskier the loan is. That's why most lenders will insist on being in first position.

In the scenario above, the assumable mortgage already exists, so yes - the assumption is that it is in first position, and any future mortgages would be junior to it, as noted above.

It is possible (but sometimes unlikely) for an existing lender to agree to subjugate, and accept a less senior position behind a newer lien. This could happen, for example, if you have a first mortgage and a HELOC, and then you refinance the first mortgage. The new refi mortgage lender would insist on being in first position, so your HELOC lender (who was actually already in second position before the refi, but now would be senior to the new refi mortgage) would have to sign a subjugation agreement in order for you to keep your HELOC (in second position).

In a case where the lender knew they were taking a junior position at the outset, the subjugation and/or lien priority would be spelled out at closing.

In the scenario outlined above you'd assume the FHA mortgage, then have a new lender (or the seller) fund a second position mortgage for the remainder.

Paul Welden · Answer

@Skylar Como

From what I understand .....

Yes, you can assume the balance of an FHA loan at the interest rate of the existing assumable FHA loan, but you still have to qualify for the loan. Most people just think you can quickly/easily take over the payment, but you actually have to qualify for a mortgage (income, debt, DTI, credit, etc.).

But you are assuming an FHA 203b (regular FHA loan) and are not assuming an FHA 203k. So, to use an FHA 203k for your scenario, after you assume the loan, you'd have to refi into an FHA 203k and get the interest rate at today's rate for the 203k, and the 203k would include paying off the assumable loan + rehab costs.

You cannot get an FHA 203k only for the rehab if there is a balance on the existing mortgage. If there is a balance on the existing mortgage, you'd have to refi into an FHA 203k. But, if there is a $0 balance on the existing mortgage, then you can get an FHA 203k only for the rehab.

Hope this helps!

Jeff Copeland · Answer

In the vast majority of cases, if you are getting a new mortgage (203k or otherwise), the new lender will insist on being in first position, meaning the original mortgage would have to be paid off (or the original lender would have to agree to subjugate to the new one, which can be a tall order - Why would they?)

Yes, FHA loans are assumable...if you qualify for the mortgage and are approved by the lender (but note also that FHA loans are for owner occupants only, not for investment properties).

The reasons you'd want to assume a mortgage are usually rate and terms. For example, if your seller had a $100k mortgage at 2.5%, and mortgage rates are currently approaching 7%, it would make a lot of sense to assume the 2.5% mortgage if you could. For example: You might put $20k down and get a new $80k second position mortgage at 8% (the rate would be higher because the risk is higher in second position). Your "blended rate" would then be somewhere in the 5's.

Or, better yet, maybe you give the seller $20k as a down payment, assume their mortgage, and have them seller finance the remaining $80k.

Khari F. · Answer

So seller financing would be best option around credit and income requirements? But seller has to own free and clear? or can seller take 2nd position and finance their equity (interest only payments) and buyer pay debt on fist mortgage still in seller name w agreement to hand over title when paid off? Not sure that even makes sense

Khari F. · Answer

@Jeff Copeland hi I always thought assumable meant first position - since you are taking over (taking off their hands) the original that was in first. how does second come into play?

Assumable mortgage? How does that even work? 203k?

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