Demystifying VA Assumable Loan Requirements

Getting the keys to your dream home is an exciting milestone. But rising mortgage rates have complicated the math for many buyers. This year, the average 30-year fixed rate has shot up from around 3% to near 7%.

That means house hunters are seeing their buying power shrink before their eyes. Monthly mortgage payments are considerably higher at current rates

However, Veterans and other buyers do have an intriguing option thanks to a unique VA loan feature – assumability With a VA loan assumption, you take over the mortgage of a current VA borrower.

That means assuming their low interest rate and potentially slashing your monthly payment. It’s a little-used but potentially huge money saver.

In this article, we’ll break down exactly how VA loan assumptions work and what’s required to make them happen. There are guidelines and processes loan assumers must follow. And some risks VA borrowers take on when allowing assumptions.

But utilized correctly, assumptions can give buyers relief from high rates and a path to faster home equity growth. Let’s dig in on the details.

What is a VA Loan Assumption?

First, let’s define exactly what a VA mortgage assumption entails

With a VA loan assumption, you essentially take over or inherit the active mortgage of a current VA homeowner. The buyer purchases the home and becomes responsible for making the monthly payments.

It’s different than a traditional purchase in some key ways:

• Lower mortgage rate: You assume the VA mortgage rate the current homeowner locked in. This is likely much lower than current market rates. That cuts your monthly payment substantially.

• Limited costs: Assumptions don’t require typical loan fees like origination charges, appraisal fees and more. The buyer pays 0.5% of the loan amount as a VA funding fee.

• No requalification: The lender won’t rewrite the mortgage. You take over the loan as-is. Buyers must still prove creditworthiness, however.

VA loans have been assumable since the program launched in 1944. So it’s always been an option. But here’s why assumptions make so much sense in today’s higher rate environment.

Why Consider a VA Mortgage Assumption Now

Historically low rates fueled the red-hot housing market in 2020 and 2021. But the landscape has changed dramatically this year as the Federal Reserve moves to combat inflation.

Its series of rate hikes have sent the average 30-year fixed mortgage rate surging. Rates have more than doubled in 12 months.

Here’s a look at the spike:

• January 2022: 3.56%
• January 2023: 6.15%

For buyers, that sharp rate rise means housing is less affordable. Monthly mortgage payments are considerably higher now.

Assuming a VA loan with a sub-5% rate locked in years ago can lead to immense savings versus financing a new purchase at current market rates.

For example, take a $300,000 loan amount:

• 3% rate = $1,265 monthly payment
• 7% rate = $1,996 monthly payment

That’s a difference of $731 per month, nearly $9,000 per year in housing costs.

Clearly, assumptions can make a huge dent in expenses for qualified buyers able to take over a low VA rate mortgage. That leads to more house for your money or more cash freed up to meet other financial goals.

Who Can Assume a VA Mortgage?

A common misconception is that only Veterans qualify to assume VA loans. But civilians can also utilize VA assumptions.

The only major requirements to assume a VA mortgage are:

• Creditworthy: Assumers must meet VA credit guidelines. We’ll cover specifics on what that entails shortly.

• Cash to close: You’ll likely need funds to buy out the homeowner’s equity. VA won’t finance 100% of the purchase price.

• Occupancy: To assume a VA loan, you must intend to occupy the home as your primary residence.

However, there are some key considerations for Veteran sellers allowing civilians to assume their VA mortgage:

• The homeowner’s VA entitlement stays tied up in the loan until it’s paid off. This limits future use of their VA home loan benefit.

• If the assumer later defaults, it counts against the Veteran seller’s entitlement.

So in many cases, VA borrowers only consider assumptions by other Veterans with entitlement to substitute. This releases the seller’s entitlement back to them for reuse.

But assumptions are open to all qualified borrowers. Talk to a lender to map out your specific assumption options.

VA Assumable Loan Requirements

While assumptions don’t involve full re-underwriting, assumers do face some credit and financial hurdles from the VA.

Lenders will evaluate critical factors like your income, assets, debts and credit history. Here are the key underwriting guidelines to meet:

Credit score: The minimum FICO credit score to assume a VA loan is 620. But many lenders prefer scores of at least 640 to 660 for approval. The higher your score, the better.

Debt-to-income ratio: VA follows the standard front-end DTI limit of 41% for monthly housing costs vs. your gross income. Total DTI including all monthly debts is typically capped at around 50%.

Cash to close: Assumers must have funds available to pay the VA funding fee and buy out the seller’s home equity. Lenders generally won’t finance 100% of the purchase price.

Stable income: Documented stable earnings from employment, disability pay, pensions or other consistent sources. Two years of income history is ideal.

Money in reserve: Expect a residual income evaluation to ensure you have adequate savings and reserves post-closing.

Meeting basic VA underwriting standards is critical. But requirements can vary by lender. Be ready to provide comprehensive documentation so the lender can present your strongest case when seeking VA approval.

How to Find an Assumable VA Mortgage

The first step is connecting with an experienced real estate pro. Agents with access to MLS listings can search for homes with assumable VA loans.

Some key indicators to look for:

• Listing mentions the VA loan is assumable.

• Current rate and payment are disclosed.

• Veteran seller indicates willingness to substitute entitlement.

You can also search major real estate sites yourself for these clues. But a buyer’s agent is key for maximum convenience and hand-holding during the assumption process.

How to Assume a VA Mortgage

Here are the general steps to complete a VA loan assumption:

1. Find a home with an assumable VA mortgage

Work with an agent or search yourself for listings that advertise the VA loan can be assumed.

2. Submit an assumption application

The buyer and seller complete an application agreeing to the loan assumption terms.

3. Prove creditworthiness

The lender will underwrite the assumption and verify you meet VA requirements. Be ready with documentation.

4. Come to terms on purchase

Negotiate a price with the seller. Determine how you’ll buy out their home equity and cover closing costs.

5. Close on the assumption

Finalize the purchase, submit closing documents and record the deed transfer.

6. Start making payments

You’re now officially responsible for making monthly mortgage payments at the assumed super low rate.

It can take 45 days or more to complete the end-to-end VA loan assumption process. The timeline varies by lender.

Patience and persistence pay off. Work closely with your agent and lender for optimal hand-holding during this unfamiliar process.

5 Benefits of Assuming a VA Mortgage

Let’s recap the key advantages borrowers can realize by assuming a VA loan versus traditional financing:

1. Lower Interest Rate

This is the headline benefit. Assuming a sub-5% VA mortgage rate can instantly slash your monthly payment by $500 or more versus current market rates. This discount lasts the life of the loan too.

2. Limited Fees

You’ll only pay a 0.5% VA funding fee at closing. No origination charge or other lender fees. Appraisal and credit report costs may apply but can be negotiated.

3. Faster Home Equity

With a lower rate/payment, more of your mortgage dollars go to principal vs. interest each month. This helps you gain equity faster through forced savings.

4. Buyer Negotiating Power

In a slow sales market, a low assumable VA mortgage gives sellers an advantage attracting buyer interest. Don’t be afraid to negotiate price or closing costs.

5. Less Cash Needed

Since there’s no origination fee, you may be able to put down less cash. This helps reserve funds for renovations, furnishings and more after moving in.

Again, clearly understand the risks involved before allowing someone to assume your VA mortgage. But for buyers, it’s an avenue well worth exploring in today’s housing environment.

Even a 0.5 percentage point rate