Unlocking the Advantage of Assumable FHA & VA Loans

In today's high-interest-rate environment, homebuyers are looking for every possible advantage to secure an affordable mortgage. One often-overlooked opportunity is assuming an existing FHA or VA loan, especially those issued in the past few years when interest rates were at historic lows.

An assumable loan allows a qualified buyer to take over the seller's existing mortgage, including its remaining balance, interest rate, and repayment terms. FHA and VA loans are generally assumable, but buyers must meet the lender's qualification standards, just like they would for a new mortgage.

With interest rates currently much higher than they were just a few years ago, assuming a loan that carries a lower-than-market interest rate can be a game-changer for buyers. Here are some key advantages:

Lower Interest Rate = Lower Monthly Payments - If the seller's mortgage has an interest rate of 3% or 4%, assuming the loan means immediate savings compared to today's rates, which are often above 6% or 7%. A lower rate can translate into hundreds of dollars in savings each month.

Lower Closing Costs - Unlike taking out a new mortgage, assuming an existing loan typically comes with reduced lender fees and fewer closing costs, saving the buyer thousands at the closing table.

No Need for an Appraisal - Since the buyer is taking over an existing mortgage, there's often no need for a new appraisal, reducing both costs and potential delays in the transaction.

More of Your Payment Goes Toward Principal - Because the loan is further into its amortization schedule, a higher percentage of each payment goes toward paying down the principal rather than just interest, building equity faster.

One of the biggest hurdles with loan assumptions is that the seller's remaining loan balance may be significantly lower than the home's purchase price. This means the buyer must cover the difference between the sale price and the outstanding loan balance.

For example, a home is selling for $400,000 with the seller's assumable FHA loan balance is $300,000, the buyer needs to bridge the $100,000 gap between the sale price and the assumed loan.

If a buyer doesn't have enough cash to cover this gap, there are financing options:

• Second Lien Financing ... If the buyer puts down at least 10%, they may qualify for a second mortgage to cover the remaining difference. This could come from a conventional lender or even through owner financing.
• Home Equity Loans or HELOCs ... If the buyer can arrange temporary funding to close the assumption, they may be able to get a home equity loan or line of credit to fund the difference once the property is closed and in their name.

Navigating the Loan Assumption Process

While any FHA- or VA-approved lender can originate new loans, assumptions must be processed through the current loan servicer. Some lenders may not be familiar with the process and could discourage assumptions due to lower fees and longer processing times.

Buyers should be persistent if a lender is uncooperative, request to speak with someone who understands loan assumptions.  It is to a buyers' advantage to work with a knowledgeable agent who is experienced with assumptions and can help negotiate financing solutions and streamline the process.

If you're a buyer looking for lower payments in today's market, an FHA or VA loan assumption could be an excellent opportunity. While it requires careful planning to cover the price difference, the long-term savings from a lower interest rate can make a significant impact.

Thinking about assuming a loan or selling a home with an assumable mortgage? Let's discuss how this strategy could work for you!

Don't Let Capital Gains Tax Surprise You

If you've owned your home for a long time, chances are its value has increased�maybe even doubled, tripled, or more. But did you know that a law written in 1997 still limits the amount of capital gains tax exclusion, despite skyrocketing home prices?

Currently, homeowners can exclude up to $250,000 in gains if single or $500,000 if married filing jointly when selling their primary residence, as long as they've lived there for at least two of the last five years. But with today's home values, more sellers are finding themselves exceeding this exclusion and facing a significant tax bill.

More Homeowners Are Now Affected

In 2023, nearly 8% of home sales surpassed the $500,000 capital gains exclusion. However, in high-cost states like California (28.8%), Hawaii (23.8%), Washington, D.C. (22.1%), Massachusetts (17.9%), and Washington State (15.2%), the numbers were far higher, according to CoreLogic.

What Happens If You Exceed the Exclusion?

If a homeowner sells their home for more than the exclusion allows, the excess profit is subject to long-term capital gains tax rates of 15% to 20%, plus an additional 3.8% net investment income tax for high earners.

For example, if a married couple sells their home with $1 million in gains, they can exclude $500,000, but the remaining $500,000 is taxed at these rates. Depending on their income bracket, they could owe between $95,000 and $119,000 in taxes; an expense many homeowners don't anticipate.

How to Reduce Your Capital Gains Tax Liability

The key to minimizing capital gains tax is increasing your home's cost basis, which is done by tracking capital improvements made over the years. Many homeowners are aware that large-scale renovations count, but small-dollar upgrades also qualify and can add up significantly over time.

What qualifies as capital improvements:

• Kitchen and bathroom remodels
• New roofs, HVAC systems, and water heaters
• Adding a deck, patio, or additional living space
• Energy-efficient upgrades like new windows or solar panels
• Permanent landscaping enhancements, like retaining walls or irrigation systems

However, repairs and maintenance (like painting, fixing leaks, or replacing worn carpet) typically do not qualify unless they are part of a larger renovation.

The Importance of Tracking Expenses

To take advantage of these tax-saving opportunities, homeowners must document their improvements throughout their entire homeownership.

• Keep receipts for materials and labor
• Take before-and-after pictures of major renovations
• Save contractor invoices or permits for work done
• Maintain a running list of all home upgrades

Without proper records, homeowners could lose out on thousands in potential tax savings.

Stay Informed and Plan Ahead

The capital gains tax law may not have adjusted to today's market, but smart homeowners can take proactive steps to minimize their tax burden. If you're thinking about selling, now is the time to gather your records and consult with a tax professional to ensure you're maximizing your cost basis.

For more information, download IRS Publication 523 and our Homeowners Tax Guide for a detailed look at what qualifies.

If you have any questions about how today's home values impact your potential sale, feel free to reach out...I'm happy to help!

In Life, Only Death, Taxes, and Price Hikes Are Guaranteed

Benjamin Franklin famously stated that "in this world, nothing is certain except death and taxes." While his words still ring true, there's another unavoidable reality in modern life: rising costs. From groceries to energy bills, the cost of living continues to climb, and one of the biggest contributors to this is housing.

Housing has always been a major expense for individuals and families, but recent data highlights just how burdensome it can be. According to an article released in September 2024, renters spent a median of 31.0% of their income on housing costs, while homeowners with a mortgage spent 21.1%, and those without a mortgage spent just 11.5%. Despite this, 18.8 million homeowners were still dedicating more than 30% of their income to housing expenses, illustrating that affordability remains a challenge for many.

The long-term trends in housing costs are equally telling. According to the Federal Reserve Economic Data, rent increases have averaged 3.88% annually over the past 60 years, outpacing the average inflation rate of 3.7% during the same period. Meanwhile, the median home has appreciated at an average annual rate of 5.56%, showing that homeownership not only shields against rising rents but also builds wealth over time.

The financial benefits of homeownership extend far beyond escaping annual rent hikes. The latest Federal Reserve Board Survey of Consumer Finance reveals that median homeowners have 38 times the household wealth of renters. This wealth disparity underscores the power of owning a tangible asset like a home, which appreciates in value and provides stability in a world of ever-increasing costs.

While rising home prices and higher mortgage rates may deter some from entering the housing market, it's important to consider the long-term financial advantages of homeownership. Waiting on the sidelines, hoping for prices or rates to drop significantly, could mean missing out on years of equity growth and continued rent hikes.

A significant factor influencing today's housing decisions is mortgage rates. The historically low rates seen before the pandemic were an anomaly, not the norm. The 52-year Freddie Mac average for 30-year fixed-rate mortgages is 7.74%, which is much closer to the rates we're seeing today. For prospective buyers, accepting the current rates as the "new normal" is key to moving forward and securing the long-term benefits of homeownership.

While some individuals are genuinely priced out of the housing market, many are financially capable of purchasing a home but are hesitant due to uncertainty. However, delaying a purchase means continuing to pay rising rents and missing out on the wealth-building potential of owning a home. Even at current rates, the long-term advantages of homeownership�including equity growth, tax benefits, and protection against inflation�far outweigh the costs of waiting.

Death, taxes, and rising costs are life's unavoidable truths, but how you navigate them can shape your financial future. Housing represents one of the most significant expenses for individuals and choosing to own rather than rent can make a profound difference in wealth accumulation and financial security.

While mortgage rates and home prices may feel intimidating, they reflect a long-term norm rather than an exception. For those who can afford to buy now, stepping into the market could be the key to securing stability and wealth in an uncertain world. Don't let hesitation hold you back from building a solid foundation for your future. 

Download the Homeowners Tax Guide.