How Do You Assume a VA Loan? A Complete Guide

Assuming a VA loan can be an excellent way for both buyers and sellers to benefit from the unique advantages of the VA loan program. With mortgage rates on the rise more homebuyers are interested in assuming existing VA loans with lower interest rates. At the same time, the assumability feature gives VA loan borrowers a useful marketing tool when selling their home.

But how exactly does the process work? Can anyone assume a VA mortgage, or are there eligibility requirements? What are the pros and cons of assuming versus getting a new VA loan? This comprehensive guide covers everything you need to know about assuming a VA home loan.

What Is a VA Loan Assumption?

An assumption allows a new borrower to take over the existing VA mortgage of the current homeowner. Instead of applying for a new loan, the assumptor inherits the original home loan, including its interest rate, remaining term, and outstanding balance

Assuming a mortgage is much different than a traditional home purchase where the buyer gets a new loan in their name. With an assumption the assumptor steps into the shoes of the original borrower.

VA loans are assumable due to the VA guaranty, which stays attached to the property even after a loan assumption. That’s different from conventional loans, which in most cases cannot be assumed by a new borrower.

Who Is Eligible to Assume a VA Loan?

The VA has very broad assumption guidelines, meaning almost any creditworthy borrower can assume a VA mortgage. There are just a few baseline requirements:

• Credit score: Most lenders require at least a 620 FICO score. Some have higher minimums.

• Income/debt: Assumptors must have enough income to support the monthly payment. Lenders analyze this using debt-to-income (DTI) ratios. Many look for DTI below 41%.

• Cash to close: Assumptors must pay off the seller’s equity in the home. This often requires a large cash payment at closing.

You do not have to be a veteran to assume a VA loan. The VA allows both veterans and civilians to take over these mortgages. That gives homeowners a large pool of eligible assumptors.

The Pros and Cons of Assuming a VA Mortgage

Assuming a VA loan offers several potential benefits but also comes with risks that buyers and sellers need to weigh.

Pros for Buyers

• Lower interest rate: Assuming a loan originated years ago likely gives you a lower rate than available today. This results in huge monthly savings.

• Lower fees/closing costs: Assumptions skip many traditional mortgage fees like origination charges, appraisal cost, and lender credits. You pay 0.5% of the loan amount as a VA funding fee.

• Faster closing: Much of the typical loan paperwork is avoided with an assumption. This can translate to a shorter timeline from offer to close.

• Easier qualification: Lenders mainlyscrutinizeyour finances. Things like home value and appraisals are less important.

Cons for Buyers

• Limited financing options: You can’t adjust loan term or amount assumed. Preapprovals and rate shopping also aren’t part of the process.

• Large cash payment: You must pay off the seller’s home equity to complete the assumption. Often requires $10,000+ in cash.

• Risk of future changes: The lender could sell the servicing rights to your assumed loan, leaving you to work with an unknown company.

Pros for Sellers

• Expanded pool of buyers: Assumable loans attract more buyers thanks to below-market rates.

• Increased home value: Buyers may pay a premium for the home given the assumable low-rate financing.

• Quick sale: Assumptions can close in half the time of traditional sales thanks to less paperwork.

Cons for Sellers

• Losing VA entitlement: Allowing a civilian to assume ties up your entitlement until the loan is fully paid off.

• Future default risk: You’re liable if the assumptor defaults down the road and damages your credit.

• Reduced cash at close: Buyers won’t overpay too much for a low-rate assumption since they take on risk too.

Overall, buyers stand to benefit more from assumptions in a rising rate environment. But sellers also gain advantages from the increased demand and limited supply of assumable mortgages.

How Does the Assumption Process Work?

The process to assume an existing VA loan includes these primary steps:

1. Find an assumable VA mortgage

Potential assumptors can work with a real estate agent to identify listings with assumable financing. Loan assumptions are also sometimes advertised directly in the property listing.

2. Review loan documents

The buyer reviews the original loan documents, including the note, deed, and any modifications or assumptions done in the past. This provides all the loan’s key details.

3. Submit assumption application

The buyer completes an assumption application with the lender servicing the loan. Approval is based on credit, income, assets, and other qualifications.

4. Get VA approval

The lender sends the assumption agreement to the VA for review and approval. The VA issues a loan guaranty certificate upon approval.

5. Close on the home

During closing, the assumptor makes their cash payment to the seller to buy out their home equity and pay closing costs/fees.

6. Record the transaction

After closing, the lender records the assumption with local authorities. The home title transfers to the assumptor’s name.

Expect the process to take 30-45 days in most cases. It can sometimes close in as little as two weeks if all goes smoothly.

Key Things to Know About VA Loan Assumptions

Beyond the basics, there are some other key facts to understand about VA loan assumptions:

• Almost any VA loan can be assumed, whether it’s a fixed rate, ARM, purchase, or refinance. The key is that it’s an active loan in good standing.

• Sellers can limit assumptions by putting restrictions in the sales contract, like requiring assumptors to be veterans or meet certain income requirements.

• Lenders scrutinize assumptors thoroughly since they’re handing over an existing loan. Minimum credit and income levels often apply.

• Home value matters less since you’re assuming an active mortgage. But lenders still want the home to appraise near the sale price.

• Veterans can swap entitlements through a formal substitution process. This allows the seller to reuse their full VA benefits.

• Closing costs are limited but can include title fees, recording fees, taxes, the VA funding fee, and more depending on the property location.

• Assumption veterans lose VA loan benefits tied to the property until the mortgage is paid off through the full loan term.

Finding the Right Lender for a VA Loan Assumption

Not all lenders process assumptions frequently. Be sure to find one with extensive experience with this type of transaction. Local banks and credit unions are a good place to start.

The ideal lender will have:

• A fast, streamlined assumption process

• Low assumption fees

• Familiarity with VA assumption guidelines

• Established relationships with the VA to facilitate smooth approvals

• Ability to close assumptions in 2-3 weeks in some cases

Working with a lender lacking assumption expertise can result in a clumsy, time-consuming transaction. Be picky in choosing the right lending partner.

When Does a VA Loan Assumption Make Sense?

With the many moving parts involved, assumptions aren’t the optimal route for every homebuyer or seller. Here are some good scenarios for utilizing a VA loan assumption:

For buyers

• Interest rates have risen significantly since the VA loan originated

• You need to maximize housing affordability

• You have cash available to pay the seller’s equity

• You don’t mind the future risk of lender servicing transfers

For sellers

• You have significant home equity you want to cash out

• You’re willing to accept the entitlement risk from civilian assumptors

• You need to sell quickly due to a deadline like an upcoming move

• The home has unique attributes that limit its buyers pool

Alternatives to Assuming a VA Mortgage

VA loan assumptions involve tradeoffs. If the risks or limitations don’t work for you, here are a few alternatives to consider:

VA cash-out refinance – Veterans can tap home equity with a cash-out refiwhile keeping original VA entitlement intact.

VA purchase with down payment – Paying even 5% down on a new VA loan can help you land better rates/terms versus assuming.

FHA loan assumption – FHA loans are assumable, giving buyers another option albeit with mortgage insurance.

Conventional loan – Consider a conventional mortgage if you want predictability and have funds for a down payment.

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