assuming a va loan process

The Complete Guide to Assuming a VA Loan in 2023

Taking over someone else’s VA mortgage can be an excellent way for homebuyers to secure favorable loan terms in today’s rising rate environment. VA loans are assumable – meaning qualified buyers can take over the seller’s existing VA mortgage and its low interest rate. This article will walk you through everything you need to know about assuming a VA loan, including the process, requirements, pros and cons.

What is a VA Loan Assumption?

A VA loan assumption allows a buyer to take over the mortgage of a homeowner with an existing VA loan. Instead of getting their own new mortgage the buyer assumes the remaining balance and takes over the monthly payments.

The key benefit is inheriting the low interest rate on the seller’s VA loan. Rates on new mortgages today are significantly higher, so assuming a VA loan can result in interest rate savings of 2% or more compared to current market rates. This results in substantial savings on the monthly payment and overall cost of the mortgage.

In addition to rate savings, VA loan assumptions come with lower closing costs since many fees charged on a new mortgage – such as appraisal and underwriting fees – are avoided.

Who is Eligible to Assume a VA Loan?

The VA has broad guidelines around eligibility for assumptions:

• You do not need to be a Veteran to assume a VA loan Both Veterans and civilian homebuyers are eligible.

• Credit guidelines are similar to those for a new VA mortgage. Lenders will evaluate your credit score, debt-to-income ratio, and other factors to determine if you qualify.

• Occupancy requirements are the same You must intend to use the home as your primary residence to assume the loan

• VA loans can be assumed more than once over the life of the mortgage.

Benefits of Assuming a VA Mortgage

Assuming a VA loan offers homebuyers two primary advantages:

Lower Interest Rate

This is the main appeal of an assumption. VA rates today are hovering around 7%, compared to 3-4% for existing VA loans originated over the past couple years. The ability to take over a low VA rate from years ago translates to huge savings.

On a $300,000 mortgage, the monthly principal and interest payment on a 7% loan is about $2,010. At a 3% rate, the monthly P&I drops to $1,265 – a savings of $745 per month.

Lower Fees

In addition to interest savings, assumptions come with significantly lower upfront fees compared to a traditional mortgage. Buyers avoid appraisal costs, underwriting fees and other charges lenders levy when originating a new loan.

The only fees involved on a VA assumption are:

• VA Funding Fee: 0.5% of the loan balance, paid to VA

• Assumption Processing Fee: Up to $300 charged by the lender

• Any applicable state/local taxes and recording fees

That results in total closing costs of $2,000-3,000 on a $300,000 assumption – compared to roughly $6,000-$8,000 on a new VA loan.

Cons of Assuming a VA Loan

While assumptions come with advantages, there are also a few potential drawbacks to consider:

Paying for the Seller’s Home Equity

To make an assumption worthwhile, the seller will require compensation for any equity they have built up. As an example:

• Seller owes $300,000 on their VA mortgage

• Home value is $350,000

• Seller has $50,000 in equity

The buyer would need to provide the seller $50,000 at closing to capture their equity position. This is often paid in cash, which can be a challenge for some buyers.

Impacts on the Seller’s VA Entitlement

For a Veteran seller, allowing a civilian to assume their VA loan puts their entitlement at risk. VA entitlement gets used up each time a Veteran utilizes the VA loan benefit.

If a civilian assumes the loan, the seller’s entitlement remains tied up in that mortgage until it’s paid off. That can limit their ability to reuse the VA loan benefit in the future.

Veteran sellers may require the buyer to be a Veteran who substitutes their entitlement in order to avoid this impact.

The VA Loan Assumption Process

If you’ve decided to pursue a VA loan assumption, here are the key steps involved:

1. Find an Assumable VA Mortgage

The first step is locating a home with an existing VA loan that can be assumed. Real estate agents can help search property listings to find VA/FHA loans. Sellers may also advertise assumability.

1. Review Qualification Guidelines

Once you’ve identified a property, review the loan assumption requirements outlined by the lender. This includes credit score minimums, debt-to-income limits and other qualifying criteria.

1. Submit an Application to Assume

You and the seller must complete an application to assume the mortgage and agree to the terms involved – including compensation to the seller for their equity.

1. Provide Financial Documentation

Similar to a new mortgage, you’ll need to provide documentation to prove your creditworthiness including:

• Credit report
• Verification of income/employment
• Bank statements
• Details on assets and liabilities

1. Obtain VA Certificate of Eligibility (COE)

If you’re a Veteran seeking to substitute your entitlement, you’ll need a COE from VA proving you have entitlement available.

1. Lender Underwriting & Approval

The lender will underwrite the assumption using VA guidelines and render an approve/deny decision within 45 days of receiving a complete application.

1. Funding Fee and Closing

If approved, you’ll pay the VA funding fee and any other closing costs. The assumption can then be finalized.

1. Record Transfer of Ownership

Finally, the lender will record the transfer of ownership and loan liability. You’re now the proud owner of the home with the assumed mortgage!

Finding VA Loans Available for Assumption

The first step in pursuit of a VA loan assumption is finding an eligible VA mortgage that can be assumed. Here are some tips for locating assumable VA loans:

Work with a Real Estate Agent

Connecting with a trusted real estate agent is the easiest way to find potential VA assumptions. Agents have access to detailed MLS listings and can quickly filter for VA/FHA loans that may be assumable.

Focus on MLS Keywords

When viewing MLS listings on your own, keep an eye out for keywords like “VA assumable” or “VA mortgage assumable” to zero in on VA loans.

Check Major Real Estate Sites

While sifting through listings on Zillow, Realtor.com and other platforms, you can filter specifically for VA financed properties. Sellers may advertise assumability in the listing remarks.

Talk to Lenders About Availability

Connecting with lenders familiar with the VA loan program can help you understand what assumable inventory may be available in your local market.

Consider a Mortgage Broker

Mortgage brokers have wholesale channel access to view and identify assumable loans across multiple markets. They can be a great assumption resource.

Respond to “For Sale by Owner” VA Listings

FSBO sellers with VA loans often have extra motivation to consider assumption options. Monitoring FSBO listings on Craigslist and elsewhere can uncover VA loan assumptions.

Assuming a VA Mortgage Out-of-State

Geography is no limitation when it comes to VA assumptions. You can assume a VA loan on a property located in any state in the country.

The process to assume an out-of-state VA loan is the same:

• Find an eligible VA mortgage in the target state
• Check qualification guidelines with the servicer
• Submit an application and Documentation
• Obtain VA Certificate of Eligibility
• Complete assumption after lender approval

The closing would take place at a title company local to the home, like any traditional out-of-state home purchase. Travel may be required to view the property and attend closing.

VA Loan Assumptions for Foreclosures/Short Sales

VA rules prohibit assumptions on properties going through foreclosure or short sale. However, buyers can assume the mortgage immediately after the foreclosure sale or short sale closes.

This allows buyers to purchase the home out of foreclosure and immediately assume the prior VA mortgage. Talk to listing agents to find newly foreclosed VA properties that may offer assumption opportunities.

The VA assumption process remains the same. But buyers will likely need above-average credit and assets to convince the lender they’re a good risk right after the previous owner’s default.

Assuming a VA IRRRL Mortgage

A VA Interest Rate Reduction Refinance Loan (IRRRL) can also be assumed, providing rate savings. The lower fees of an IRRRL carry over to an assumption as well.

According to VA guidelines, the borrower must have made at least six consecutive monthly payments on the IRRRL before it can be assumed. There are also limitations around assuming an IRRRL the first year after it was originated.

But buyers may be able to immediately assume an IRRRL refinanced more than one year ago. That provides the benefits of the ultra-low rates from recent