Assumptions are an Alternative

In the late 80's, both FHA and VA began requiring buyers to qualify to assume their mortgages. The main reason there haven't been many assumptions in the past 25 years is that interest rates have been steadily going down and if a person has to qualify, they might as well do it on a new loan and get a lower interest rate.

Based on projections by Fannie Mae, Freddie Mac, the MBA and NAR, rates for the second half of 2017 and 2018 are expected to be higher. When interest rates on new mortgages are higher than the rates of assumable FHA and VA mortgages in the recent past, it becomes more advantageous to assume the existing mortgages.

FHA and VA loans originated with lower than current interest rates have great advantages for buyers and sellers.

1. Interest rate won't change for the qualified buyer
2. Lower interest rate means lower payments
3. Lower closing costs than originating a new mortgage
4. Easier to qualify for an assumption than a new loan
5. Lower interest rate loans amortize faster than higher ones
6. Equity grows faster because loan is further along the amortization schedule
7. Assumable mortgage could make the home more marketable

An Assumption Comparison can help determine the savings and financial benefits of an assumable mortgage with a lower rate.

Family & Friends Mortgage

Anytime a lender and borrower can agree on rates and terms, it can be a good match but IRS has specific rules that govern the transaction especially when the parties are family or friends.

The loan must be done in a business-like manner with a written note specifying the loan amount, interest rate, term and collateral. IRS requires that the mortgage be a recorded lien to allow the interest deduction.

Sometimes, a friends and family situation might have a less than normal interest rate on the mortgage. However, the rate charged in the note is regulated by the minimum applicable federal rate which is published monthly by IRSbased on current Treasury securities. For July 2017, the rate is 2.57% for terms over nine years.

The seller must report the interest paid to them along with the name, address and Social Security number on schedule B when the buyer uses the property as their principal residence.  A mortgage between family and friends can be good for both parties. It may allow the borrower a slightly lower rate without the expenses of a traditional lender while giving the note holder a higher rate than they can earn in available investments. 

Your tax professional can guide the transaction whether you're a buyer or a seller and your real estate professional can help arrange to have the documents drawn and filed.