Component 4: Assumable Mortgage

The last key component to the Tadaima Co-ownership model is an assumable mortgage, but unlike the other components, it’s the only one that’s optional. The reason why we suggest it is because we wanna reduce every cost the end consumer will have to pay to bring down the cost from 10% to 2% as best as possible. And another one of these costs we need to look at as well is the mortgage.

Mortgages have to have a lot of underwriting that needs to be done on both the buyer of a property and the property itself. The underwriting process is an extensive process which adds to the cost significantly when purchasing a home. This is because the bank is going to give you money to buy the home, and they want to feel confident that if they have to exercise their power of sale clause, which we learned about in the previous section, that they can get their money back on the home. Once they’ve determined that, they still have to file all the paperwork properly to make sure during a fair legal process, that that will be the case. And most homes have a mortgage that went through this same process currently on their home, and most buyers will have to go through this process with their lender too if they want to buy a home.

So how do we improve this process? Well by using an assumable mortgage. Reflecting on the process above, why does a buyer need to get a new mortgage to buy a home, when there’s already a mortgage currently on the home? Why repeat the process? Well that’s because it’s become status quo because banks don’t have to in the US, and they make more money by not. Back in 1982 under the Reagan administration the Garn-St. Germain Act was passed allowing banks to exercise the due on sale clause when a property was sold. That means whenever a property was sold, the remaining balance must be returned. So then there was no loan left to takeover. But there is still one loan left today that does allow this, and those are FHA loans.

Using an assumable FHA mortgage, each co-owner can fully handoff all the liability and responsibility that comes with the home, and allowing them to walk away with minimal risk at that point. The same can still be done with a Tadaima home by removing the old mortgage and putting a new one on it, but this way is more costly, and as to why we recommend an FHA loan and consider it a core component.