Assumable FHA Loan

[Ariba]

How do you calculate and adjust the subject property for an assumable loan with a below-market interest rate of 3% in comparison to the current market rate of 6%? In this case, the interest rate differential is 3%. Therefore, how and where do you reflect the financial benefit in the purchase price while assuming the existing loan?

Where do you reflect this adjustment in the comparable grid?

 

[Mike Ault]

How do you calculate and adjust the subject property for an assumable loan with a below-market interest rate of 3% in comparison to the current market rate of 6%? In this case, the interest rate differential is 3%. Therefore, how and where do you reflect the financial benefit in the purchase price while assuming the existing loan?

Where do you reflect this adjustment in the comparable grid?

You don't. From the Fannie Mae selling guide –

Positive adjustments for sales or financing concessions are not acceptable. For example, if local common practice or law results in virtually all of the property sellers in the market area paying a 1% loan origination fee for the purchaser, and a property seller in that market did not pay any loan fees or concessions for the purchaser, the sale would be considered as a cash equivalent sale in that market. The appraiser must recognize comparable sales that sold for all cash or with cash equivalent financing and use them as comparable sales if they are the best indicators of value for the subject property. Such sales also can be useful to the appraiser in determining those costs that are normally paid by sellers as the result of common practice or law in the market area.

B4-1.3-09, Adjustments to Comparable Sales (01/31/2017)

selling-guide.fanniemae.com

 

[Ariba]

You don't. From the Fannie Mae selling guide –

Positive adjustments for sales or financing concessions are not acceptable. For example, if local common practice or law results in virtually all of the property sellers in the market area paying a 1% loan origination fee for the purchaser, and a property seller in that market did not pay any loan fees or concessions for the purchaser, the sale would be considered as a cash equivalent sale in that market. The appraiser must recognize comparable sales that sold for all cash or with cash equivalent financing and use them as comparable sales if they are the best indicators of value for the subject property. Such sales also can be useful to the appraiser in determining those costs that are normally paid by sellers as the result of common practice or law in the market area.

B4-1.3-09, Adjustments to Comparable Sales (01/31/2017)

selling-guide.fanniemae.com

Thank you for the input. However, this has nothing to do with assumable loans for the subject property. For example on a $500,000

• With a 3% interest rate, the total amount paid over the life of the loan is $950,000.
• With a 6% interest rate, the total amount paid over the life of the loan is $1,400,000.

Are you telling me Fannie Mae is stating there is no benefit and there should be no adjustment?

Bottom line, In general, assumable loans impact the value of a property, and therefore adjustments should be made.

 

[Mike Ault]

Thank you for the input. However, this has nothing to do with assumable loans for the subject property. For example on a $500,000

• With a 3% interest rate, the total amount paid over the life of the loan is $950,000.
• With a 6% interest rate, the total amount paid over the life of the loan is $1,400,000.

Are you telling me Fannie Mae is stating there is no benefit and there should be no adjustment?

I'm telling you that no matter how good your explanation, the GSE's will not accept a positive adjustment on the financing concession line. This has been confirmed multiple times by multiple people here on the forum, I've never made one myself. Your mileage might vary. The only problem with the "give it a try and see what happens approach", is that several months or years later it might generate a repurchase demand for your client, with all fingers pointing directly at you.

 

[J Grant]

How do you calculate and adjust the subject property for an assumable loan with a below-market interest rate of 3% in comparison to the current market rate of 6%? In this case, the interest rate differential is 3%. Therefore, how and where do you reflect the financial benefit in the purchase price while assuming the existing loan?

Where do you reflect this adjustment in the comparable grid?

we do not adjust the subject for terms of financing-

If the subject is being sold and the terms affect teh sale price, we can comment on that of course and are free not to rely that much or at all on the sale price as a value indicator then

 

[Dublin ohio]

Thank you for the input. However, this has nothing to do with assumable loans for the subject property. For example on a $500,000

• With a 3% interest rate, the total amount paid over the life of the loan is $950,000.
• With a 6% interest rate, the total amount paid over the life of the loan is $1,400,000.

Are you telling me Fannie Mae is stating there is no benefit and there should be no adjustment?

Bottom line, In general, assumable loans impact the value of a property, and therefore adjustments should be made.

What is the difference between the loan amount and the purchase price?

 

[J Grant]

Thank you for the input. However, this has nothing to do with assumable loans for the subject property. For example on a $500,000

• With a 3% interest rate, the total amount paid over the life of the loan is $950,000.
• With a 6% interest rate, the total amount paid over the life of the loan is $1,400,000.

Are you telling me Fannie Mae is stating there is no benefit and there should be no adjustment?

Bottom line, In general, assumable loans impact the value of a property, and therefore adjustments should be made.

Not for the SUBJECT

Wouldnt an experienced appraiser know that by now... if it was a comp, you could adjust for it

 

[Mike Ault]

we do not adjust the subject for terms of financing-

If the subject is being sold and the terms affect teh sale price, we can comment on that of course and are free not to rely that much or at all on the sale price as a value indicator then

Good point! I was assuming the scenario that the OP was discussing had to do with a comparable, not the subject. My bad.

 

[Ariba]

This week, I encountered a comparable sale where an assumable FHA loan contributed to a significantly higher sale price than the market value. Consequently, adjustments were necessary to ensure an accurate valuation. While the higher sale price may be attributed to the value added by the assumable FHA loan, I understand that it is a common practice in appraisals to adjust for comparables with assumable loans, recognizing the impact such financing options can have on the sale price. However, when assessing the subject property with an assumable loan, adjustments are typically not made for this specific feature. This highlights the differential treatment of assumable loans in comparable sales versus the subject property.

 

[Tom D]

typically, the buyer with an assumable mort may have to come in with more cash to make the difference, especially if the loan has some age on it. would you adjust the subject for an all cash deal, getting a better sale price. however, if you can get an lower rate assumable mortgage it certainly is worth it.