VA loans have a unique feature that sets them apart from conventional mortgages – they are assumable. This means that under certain conditions, a buyer can take over the seller’s existing VA loan.
Assumability opens up opportunities both for buyers and sellers. For buyers, it provides a chance to skip mortgage qualifying and lock in lower interest rates from when rates were lower. For sellers, it expands the pool of qualified buyers.
However, assumability also comes with risks and limitations that VA borrowers should understand before choosing this route. In this complete guide, we’ll cover:
- What is a VA loan assumption?
- How does assuming a loan work?
- Who can assume a VA loan?
- Pros and cons of assuming a VA loan
- VA loan entitlement considerations
- Finding assumable VA loans
- The loan assumption process
- FAQs
What is a VA Loan Assumption?
A VA loan assumption allows a buyer to take over the mortgage of the current homeowner. Rather than applying and qualifying for a new loan, the buyer “assumes” the original VA loan under its current terms.
This means stepping into the shoes of the seller and taking over their:
- Remaining loan balance
- Interest rate
- Monthly principal and interest payments
- Loan maturity date
Essentially, assumptions allow a seamless transfer of the loan from seller to buyer The lender remains the same, and the loan terms remain unchanged.
How Does Assuming a Loan Work?
During a VA loan assumption the buyer makes an agreement with the seller to take over their loan. Here are the key steps
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Buyer pays closing costs: The buyer will pay a 0.5% VA funding fee, as well as any appraisal or credit check fees. This is significantly less than origination costs on a new loan.
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Loan is transferred: The lender transfers the loan into the buyer’s name. There are no changes to the loan itself.
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Seller receives payout: If there is any equity built up in the home, the seller receives those proceeds. The buyer will either pay cash or finance this amount.
Once completed, the buyer now makes the monthly mortgage payments and is subject to the loan’s original terms until the loan matures or is paid off.
Who Can Assume a VA Loan?
VA loans can be assumed by veterans and non-veterans alike. The lender will evaluate the buyer’s creditworthiness and ability to make payments on the loan. Assuming buyers must meet all of the following criteria:
- Good credit (exact minimum score varies by lender)
- Sufficient income to cover mortgage payments
- History of on-time rent/mortgage payments
- Stable employment history
Veterans assuming a VA loan have the option to substitute their entitlement. This restores the seller’s entitlement so they can reuse the benefit on another property.
For non-veteran assumers, the seller’s entitlement remains tied up in the loan until it’s paid off.
Pros and Cons of Assuming a VA Loan
VA loan assumptions offer unique advantages but also come with risks to weigh.
Pros for Buyers
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Lower mortgage rate: The buyer inherits the home’s existing low rate, which is likely much lower than current rates on a new loan. This results in lower monthly payments.
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Less cash needed: Assumptions require significantly less money up front since origination fees and down payments are avoided.
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Faster closing: There’s less paperwork and underwriting compared to a normal purchase, allowing for a quicker closing.
Cons for Buyers
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Limited inventory: Homes with assumable mortgages can be hard to find compared to the overall housing inventory.
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Equity payout: Buyers must come up with cash to pay the seller their equity built up in the home. This reduces cost savings.
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Loan denial: Lenders reserve the right to deny assumptions if the buyer doesn’t meet credit or income requirements.
Pros for Sellers
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Expanded buyer pool: Assumable loans attract buyers who don’t qualify for normal financing. This can result in faster sales and higher bids.
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No closing costs: The seller avoids overlapping loan fees that come with selling and buying simultaneously.
Cons for Sellers
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Entitlement loss: Allowing a non-vet to assume ties up VA entitlement until the loan matures. This can limit future use of the VA loan benefit.
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Liability: Sellers remain liable if the assuming buyer defaults on the loan. This liability ends once the lender issues a release of liability.
VA Loan Entitlement Considerations
One important consideration for sellers is the impact assumptions have on VA home loan entitlement.
Entitlement refers to the amount a veteran can borrow in VA-backed financing without a down payment. This ranges from $36,000 to over $800,000 depending on location.
When a veteran seller allows their loan to be assumed, there are two possible outcomes:
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Substitution of entitlement (SOE): A veteran buyer uses their own entitlement, releasing the seller’s entitlement back to them. This allows the seller to reuse the VA loan benefit for another home purchase.
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No substitution: A civilian or veteran buyer who doesn’t substitute entitlement takes over the loan. The seller’s entitlement remains tied up in that loan until it’s paid off.
To avoid surprises, veteran sellers should require veteran assumers to execute an SOE agreement up front. This guarantees the return of entitlement.
For civilian assumptions, the seller must accept they are forfeiting that portion of entitlement until payoff. This may prevent them from using the VA loan benefit again if their remaining entitlement is insufficient.
Finding Assumable VA Loans
For buyers seeking to assume a mortgage, the first step is identifying available VA loans. Here are some tips:
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Contact a real estate agent and request help finding listings with assumable VA loans. A good agent will know how to search using the MLS.
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Look for “loan assumable” or “VA assumable” in the listing description of homes for sale on Zillow, realtor.com, and other sites.
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Search for VA loans well below today’s rates – these are ideal targets for assumptions. A VA loan under 5% is a red flag to investigate further.
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Widen your geographic search area. Great assumable loan deals are harder to find, so you may need to look in neighboring towns or regions.
Once you’ve identified some candidates, dig into the loan details and terms to calculate potential savings.
The VA Loan Assumption Process
If you’ve found an assumable VA loan you want to take over, here are the next steps:
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Negotiate assumption terms: Determine price and agree on who pays what fees and equity payout. Document this in the purchase contract.
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Ask lender about requirements: Contact the mortgage servicer to learn their specific criteria for credit, income, and assets to assume.
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Apply for assumption: Submit all required documentation. This usually includes an application, credit report, income verification, and bank statements.
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Get approved: The lender will underwrite and issue an approval if you meet their assumption criteria. If denied, you may have to renegotiate or walk away.
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Complete closing: Finalize the home purchase, transfer of loan into your name, and payoff of seller’s equity.
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Make first payment: The servicer will transfer the loan and coupon book or auto-pay instructions to you. Start making payments under the loan’s original terms.
Now you can reap the benefits of lower payments and interest savings an assumable VA loan provides!
Frequently Asked Questions
Can I assume a VA loan from a family member?
Yes, you can assume a VA loan from a family member if you meet the lender’s criteria. All parties must provide consent, and the seller will need to receive a payout of their equity.
What credit score is needed to assume a VA loan?
Exact credit score requirements vary by lender. But in most cases, you’ll need a minimum score in the mid-600s and a history of on-time mortgage or rental payments.
Do you qualify for a VA loan after assuming one?
Veterans who have previously used their VA entitlement do not regain any eligibility by assuming a VA loan. Your entitlement would remain capped at your prior usage.
However, first-time VA loan users would be able to utilize their full eligibility right away for a future VA loan on another property.
Can the original VA borrower be released from liability?
Yes, once the assumption is complete the servicer can issue a release of liability. This releases the original veteran borrower from any further legal responsibility for the loan.
Obtaining this release is crucial for veteran sellers allowing an assumption.
What are closing costs on a VA assumption?
Closing costs are usually between 2-5% of the loan balance, much lower than a normal purchase. Costs include the VA funding fee, appraisal, and credit check