For the most part, FHA loans are the only assumable mortgages; conventional loans, with a few exceptions, are not. That means that a home buyer who finances the purchase with an FHA-insured loan and who sells the house later, when interest rates are higher, will be able to offer a potential buyer the right to assume his low-rate FHA loan.
After approval of the buyer by the FHA, the buyer would assume all the obligations of the mortgage upon the sale of the property, and the seller would be relieved of liability. It would be just as if the loan had been made to the buyer.
The major force behind assumptions is the ability of buyers to get financing at an interest rate lower than that currently charged by lenders. If the home seller has a mortgage with a rate below the market rate, having the buyer assume the seller’s loan can be better for both. The buyer enjoys a lower rate and avoids the settlement costs on a new mortgage.
Say, for example, that a home buyer today taking a $200,000 mortgage on a $250,000 house is offered the choice between a conventional 30-year, fixed-rate mortgage at 5 percent, with no mortgage insurance required, and an FHA loan at 5 percent, with mortgage insurance and, of course, assumability. The FHA has an upfront mortgage insurance premium of 1.5 percent of the loan amount and a monthly premium of 0.5 percent. The purchaser expects to have the house for five years, at the end of which, when it is time to sell, the mortgage balance will be $183,657. Let’s suppose for the moment that the market rate at that time will be 10 percent.