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Homebuyers who want to “wind back the clock” on mortgage rates by taking over the seller’s FHA mortgage could pay up to twice as much in up-front fees for the privilege, with federal housing regulators this week announcing the first increase in allowable fees and charges for FHA loan assumptions since 2016.
Raising the cap on FHA loan assumption fees from $900 to $1,800 “is designed to compensate mortgagees for costs of processing assumptions at a rate that is appropriate for today’s market,” the Department of Housing and Urban Development announced Monday.
Originally set at $500 in 1994, the maximum fee for processing FHA loan assumptions recognizes that borrowers can’t choose which servicer will process their loan assumption, HUD said when it last raised the cap eight years ago.
The Community Home Lenders of America welcomed the increase, saying it was “crucial to allowing lenders to recoup their costs of a loan assumption, which can facilitate significant mortgage savings for homebuyers by using existing lower rate FHA mortgage loans.”
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Raunaq Singh
Increasing the cap on servicer fees might actually benefit homebuyers as well because it gives loan servicers more incentive to process assumptions, said Raunaq Singh, founder and CEO of Roam.
“While mortgage brokers typically charge 2 percent of the loan amount to originate a new loan, servicers were capped at $900 to process an assumption,” Singh said. “But assumptions require a significant amount of work with a manual underwrite and are often a time-consuming process.”
Roam, which helps homebuyers search for homes with mortgages eligible for assumption and manages the process on behalf of buyers, sellers and agents, charges a 1 percent fee to buyers through closing costs.
Singh said Roam will not pass the higher fees collected by FHA loan servicers to borrowers.
Servicer fees for VA loan assumptions are capped at $636 to $763, depending on the lender and location of the home the mortgage is tied to. The base fee for VA assumptions is capped at $250 to $300, depending on the lender type, plus a locality variance of $386 to $463 that’s intended to account for regional variances in costs borne by lenders in underwriting, processing and closing assumptions.
The regional variances for VA loan assumptions apply to four geographical areas:
- West: $463
- Northeast: $409
- South: $404
- Midwest: $386
In December, the Department of Veterans Affairs warned servicers of their obligation to process assumptions in a timely manner and outlined penalties for noncompliance.
Now that servicers have more incentive to process FHA assumptions, “I expect assumption transactions to close faster and more buyers will be able to assume a mortgage,” Singh said.
With interest rates more than twice as high as they were during the pandemic, assumable mortgages are marketed by Roam and competitors like FHA Pro and AssumeList as an affordability tool. Sellers who are still paying off a government-backed FHA, VA or USDA mortgage can offer a qualified buyer the option of assuming the balance of their loan at whatever rate they originally obtained.
Roam estimates that a borrower assuming a $500,000 mortgage at a rate of 2 percent, instead of paying 7.5 percent on a new mortgage, will save about $1,650 a month.
But in addition to servicer and loan origination fees, buyers who want to assume a mortgage will also need to compensate the seller for whatever equity they’ve built up in their home, so they’ll often need to take out a second mortgage.
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