Are VA Loans Assumable? The Ins and Outs of Taking Over a Veteran’s Mortgage

As a prospective homebuyer, you may have heard that VA loans offer special benefits like no down payment and flexible credit requirements. But one little-known perk of VA loans is that they are assumable.

Assuming an existing VA mortgage can allow homebuyers to take over the low interest rate and payment from a Veteran’s loan. This provides major savings compared to current market rates.

However VA loan assumptions also come with limitations and risks that borrowers should understand. In this in-depth guide we’ll break down how VA loan assumptions work, the pros and cons, and what it takes to qualify.

What Does It Mean for a Mortgage to Be Assumable?

An assumable mortgage is one that allows a home buyer to take over the seller’s existing loan. This is known as a loan assumption.

With a VA loan assumption, the new homeowner steps into the shoes of the Veteran seller. They become responsible for making the monthly payments and abiding by all the terms of that mortgage.

Key points about assumable loans

• The home buyer takes over the original mortgage instead of getting a new loan
• They assume the same interest rate, loan balance, and monthly payments
• Little to no closing costs as with a traditional mortgage
• Allows buyer to take advantage of lower rates from past years
• Seller must agree to release their liability on the loan

Very few mortgage programs offer assumable loans today. But VA mortgages have always allowed assumptions due to their government backing.

The Benefits of Assuming a VA Loan

Assuming an existing VA loan offers two major benefits compared to obtaining a new mortgage:

1. Lower Interest Rate

Rates on 30-year fixed VA loans currently average around 7%, according to data from Freddie Mac. Rates were below 3% as recently as 2021.

By assuming a VA loan from 2019, 2020 or 2021, buyers can lock in much lower rates vs. today’s market. This leads to substantial interest savings over the loan term.

2. Lower Closing Costs

With a traditional mortgage, buyers pay closing costs of 2-5% of the total loan amount. Costs include origination fees, appraisal fees, and title fees.

With a VA loan assumption, buyers pay none of those expenses. The only closing costs are a 0.5% VA funding fee and any lender fees. Total closing costs are typically under $2,000.

Who is Eligible to Assume a VA Mortgage?

The VA allows both Veterans and civilians to assume existing VA loans if they meet a few requirements:

Credit – Most lenders require at least a 620 credit score and stable income to qualify. Each lender sets their own credit standards.

Income – There are no set VA income limits, but lenders review your income-to-debt ratios to ensure you can afford the monthly payments. Expect to provide pay stubs and tax returns as documentation.

Down payment – No specific down payment is required for an assumption. But you must pay off the seller’s remaining equity in the home to complete the sale.

Overall, assumption requirements are less stringent than for a new VA loan. But you still must prove you’re financially qualified to take over the mortgage.

How Does the VA Loan Assumption Process Work?

If you want to assume an existing VA loan, here are key steps in the process:

1. Find a home with an assumable VA loan – Ask your realtor to search for VA/FHA loans in the MLS.

2. Get pre-qualified – Talk to a lender to get pre-qualified and prove you can afford the monthly payments.

3. Make an offer contingent on assumption – Submit an offer contingent on successfully assuming the VA loan.

4. Pay off seller’s equity – Determine how much equity the seller has and pay it off at closing via cash or financing.

5. File paperwork with lender – Complete the lender’s assumption application and provide required financial documents.

6. Obtain approval – The lender will review your application and give final approval to move forward.

7. Close on the home – At closing, you take over the mortgage,deed, and title and start making the monthly payments.

While assumptions are easier than new loans, expect the process to take 30-60 days with all the paperwork and approvals required.

Risks and Downsides of Assuming a VA Mortgage

Along with the benefits, there are also a few potential risks and downsides to weigh:

Credit risk – If the original homeowner falls behind on payments before the assumption, it can jeopardize the process.

Losing out – If another buyer makes a higher offer without an assumption contingency, the seller may accept that offer instead.

Future loan impacts – Allowing a civilian to assume your VA loan can limit your ability to reuse the benefit.

Equity challenges – Coming up with the cash to pay the seller’s equity could be a dealbreaker for some buyers.

Strict timing – The paperwork and approvals can extend the closing period by several weeks compared to a typical 30-day close.

Repairs – If you were hoping to finance updates along with the purchase, VA assumptions don’t allow for improvement funding.

While still easier than a conventional loan, the process also requires patience and planning. Know the risks before pursuing an assumption.

Alternatives to VA Loan Assumptions

If assuming an existing VA mortgage won’t work for you, here are a few other options for financing the purchase of a VA-backed home:

VA Streamline Refinance – If you’re already a VA loan borrower, the streamline process lets you refinance for low costs/fees and no appraisal. You swap the seller’s loan for a new VA loan at today’s lower rates.

Conventional Loan – Some buyers get better rates or terms by going the conventional route. You don’t need to be a Veteran to buy a home previously backed by a VA loan.

FHA Loan – FHA loans also allow assumptions. If the seller has an FHA mortgage, assuming it follows the same process as a VA loan.

Seller Financing – Ask the sellers if they’ll provide in-house financing by holding a second mortgage for a portion of the sales price. This helps ease the equity buyout.

Depending on your finances and the market, there may be better options than assuming the existing VA loan.

Tips for Getting Approved for a VA Loan Assumption

If you want to move forward with a VA loan assumption, here are some tips to boost your odds of a smooth process and approval:

• Shop with an experienced lender – Not all lenders handle assumptions regularly. Opt for one that does high assumption volume.

• Check your credit – Scan reports for errors to fix and pay down debts to improve your score above 620.

• Lower your DTI – Total debt obligations of 50% or below your income give you the best shot at approval.

• Make a large down payment – Putting down 20% or more reassures lenders you’re financially committed.

• Get pre-qualified – Upfront proof you meet lending standards makes your offer more attractive to sellers.

• Research utility costs – Taking over higher utilities after assuming a low mortgage rate can strain your budget.

While not the right fit for everyone, VA loan assumptions remain an intriguing mortgage option – one that can provide major savings in a higher rate environment. If you’re able to find an assumable loan on the right home, take time to evaluate both the advantages and risks before moving forward.