What Are the Requirements to Assume a VA Loan?

Assuming a VA loan can be an attractive option for homebuyers in today’s rising interest rate environment. By taking over the mortgage of a current VA homeowner, you may be able to lock in a lower rate than what is currently available. However, there are certain requirements you’ll need to meet in order to qualify for a VA loan assumption.

Overview of VA Loan Assumption

A VA loan assumption allows a new buyer to take over the mortgage of the current homeowner. Rather than the buyer getting a new loan for the purchase they instead assume the responsibilities and terms of the seller’s existing VA loan.

Some key things to know about VA assumptions

• The loan must be current – past due mortgages are not eligible for assumption.

• The buyer assumes full liability for repayment of the loan.

• The buyer must meet VA underwriting standards.

• VA loans can be assumed regardless of whether the buyer is a Veteran.

• The process must be approved by the lender/servicer holding the mortgage.

• VA guarantees the loan remains intact through the assumption.

Assuming a VA loan can benefit both buyers and sellers:

For buyers:

• Lock in a lower interest rate than currently available.

• Save significantly on closing costs compared to a purchase.

• Take advantage of the seller’s home equity rather than a down payment.

For sellers:

• Access buyer demand amid higher rates.

• Sell without the hassle of obtaining a new mortgage.

• Move remaining equity into next home purchase.

Now let’s take a closer look at the specific requirements to assume a VA mortgage.

VA Loan Assumption Requirements

The VA outlines broad guidelines for assumptions, but individual lenders will also issue their own requirements. Here are some common criteria you’ll need to meet:

1. Credit Score

To assume a VA loan, most lenders will want to see a minimum credit score somewhere in the 600s. Some may require a higher score around 640 or 660. Borrowers with scores below 600 will likely not qualify.

Your actual credit report is just as important as the score itself. You’ll need a proven record of managing credit responsibly over time. Areas lenders will review include:

• Payment history – on time payments, low delinquencies

• Credit utilization – not using too much of available credit

• Length of history – long credit reports are best

• Types of credit – mix of installment loans and revolving credit

• New inquiries – minimal new credit applications

2. Debt-to-Income Ratio

Lenders will also assess your debt-to-income ratio (DTI) when assuming a mortgage. DTI compares your total monthly debt payments to your gross monthly income.

Most lenders cap DTI for VA assumptions around 41%. So your total monthly debts (including the new mortgage payment) should not exceed 41% of your total monthly income. The lower your DTI, the better.

To calculate DTI:

Total Monthly Debt Payments / Gross Monthly Income = DTI

Debts factored into DTI typically include:

• New mortgage payment
• Credit cards
• Auto loans
• Student loans
• Alimony/child support
• Other installment debts

Some lenders may count additional debts like utilities when considering your DTI.

3. Residual Income

Residual income measures how much money you have left each month after paying all your debts and expenses. The VA wants to see sufficient residual income to ensure you can truly afford the mortgage long-term.

As a guide, the VA looks for at least $641 in monthly residual income for one borrower, and an additional $150 for each dependent child or family member. However, lenders will determine specific residual income requirements.

To calculate monthly residual income:

Gross Monthly Income – Total Monthly Debt Payments – Estimated Living Expenses = Residual Income

Living expenses would include items like:

• Housing (utilities, repairs, insurance)
• Transportation (gas, maintenance)
• Food
• Healthcare
• Childcare

The more residual income you can demonstrate, the better.

4. Sufficient Assets

Lenders will want proof you have enough money in your accounts to cover required down payments, closing costs, and reserves.

For a VA assumption, you typically need to pay:

• VA funding fee of 0.5% of loan amount
• Any home equity going to seller
• Appraisal fee (if applicable)
• Additional minor fees

You’ll also need reserves equal to 2-3 months of mortgage payments in your accounts after closing. Funds for down payments, closing costs, and reserves must be documented and verified.

5. Ability to Assume Liabilities

A key requirement is demonstrating the legal capacity to assume liability for the mortgage. This means becoming fully responsible for making the monthly payments and fulfilling all other terms of the VA loan.

You’ll need to provide proof of adequate income to support the required payments. And lenders will validate your intention and ability to occupy the home as your primary residence.

6. Clean VA Entitlement

If you are a Veteran assuming the loan of another Veteran, you may be asked to substitute your VA entitlement. This ensures the seller’s entitlement is freed up to reuse.

Lenders may verify you have sufficient entitlement available to cover the loan amount. And they’ll want to see your entitlement was not previously used to obtain a VA loan that later defaulted.

The VA Assumption Process

Here are the general steps to assume a VA mortgage:

1. Find an assumable VA loan – Work with a real estate agent or search online listings. Confirm the mortgage is current and eligible for assumption.

2. Review lender guidelines – Each lender will have their own qualifying criteria. Compare their requirements to your financial profile.

3. Submit your application – Provide all required documents to prove creditworthiness per lender guidelines. This may include bank statements, tax returns, income/employment details, and more.

4. Get pre-approved – The lender will assess your application and issue a pre-approval if you meet the requirements.

5. Negotiate the sale – Work with the seller to agree on a purchase price and determine the amount needed to cash out their home equity.

6. Sign the purchase contract – Contract should specify the VA loan, terms being assumed, and details for cashing out seller equity.

7. Close on time – Once approved, aim to close within the lender’s specified timeframe. The lender will file paperwork with the VA to transfer responsibility of the loan.

Assuming a VA loan gives homebuyers the chance to obtain more affordable financing amid rising rates. But you must satisfy lender requirements regarding credit, income, assets, and overall financial strength. When those key criteria are met, a VA assumption can be a win-win for both buyers and sellers.