What is an Assumable VA Loan and How Does it Work?

For many homebuyers, VA loans offer an affordable path to homeownership thanks to perks like no down payment and flexible credit guidelines. But VA loans come with another less-known benefit – they are assumable.

An assumable mortgage allows a homebuyer to take over the seller’s existing VA loan, inheriting the same interest rate and terms. This can provide huge savings compared to taking out a new mortgage at today’s higher rates.

But assumable VA loans also come with some risks and limitations that buyers need to understand upfront. In this comprehensive guide, we’ll break down exactly how VA loan assumptions work, the pros and cons, and what it takes to find and assume an existing VA mortgage.

What is a VA Loan Assumption?

An assumable mortgage is one that can be transferred from the existing borrower to a new homebuyer. The buyer essentially takes over the seller’s mortgage instead of having to apply and qualify for a brand new loan.

With a VA loan assumption the new buyer steps into the shoes of the current VA borrower. They become responsible for making the monthly payments and abiding by all the terms of that mortgage.

The Department of Veterans Affairs has special guidelines allowing for easy assumptions of VA-backed mortgages. And VA loans have been assumable since the program’s inception back in 1944.

The ability to assume a low VA mortgage rate is the biggest draw here. Rates today are significantly higher than even a year ago, let alone 5-10 years back.

For example, take a VA loan made in 2011 with a 3.5% interest rate. The buyer who assumes that loan locks in that same low rate versus taking out a new mortgage at today’s 6%+ rates.

That’s huge savings, often amounting to hundreds of dollars less required for the monthly payment.

Beyond interest rates, assumptions provide other cost savings compared to traditional mortgages. Buyers avoid hefty closing costs like origination fees, appraisal fees, and more. We’ll take a closer look at the pros and cons next.

The Benefits of Assumable VA Loans

VA loan assumptions provide homebuyers with two major advantages

1. Lower Interest Rates

Assuming an existing VA mortgage allows the buyer to lock in a low rate from when the seller originally obtained their loan. Rates today are significantly higher than they’ve been in over a decade.

The savings from assuming a 3-5% VA loan versus taking a new mortgage at 6%+ can amount to hundreds of dollars per month. That makes the home much more affordable.

2. Lower Fees & Costs

Because it’s not a brand new loan, assumptions bypass most of the fees and closing costs that come with a traditional mortgage:

• No origination fee – Often 1% of the loan amount, this covers lender processing costs
• No appraisal fee – Usually $500-$600, the appraisal establishes the home’s value
• Limited other closing costs – Like title fees, recording fees, etc.

Assumptions just require a 0.5% VA funding fee, along with some application documents. That’s several thousand dollars in savings for buyers.

Beyond the major pros above, assumptions include some other potential perks:

• Faster closing – Without all the red tape of a new mortgage
• Less documentation – No need for full income/employment verification
• Flexible guidelines – Possible even with marginal credit or income

However, loan assumptions also come with some limitations and risks buyers should understand.

The Potential Downsides of VA Loan Assumptions

Assuming an existing VA loan offers clear savings but isn’t necessarily the optimal route for every buyer. Here are some of the notable drawbacks to be aware of:

Paying the seller’s equity – The buyer has to pay out the seller’s equity in order to make the assumption worthwhile. For example, if the seller has $100k equity, the buyer needs $100k+ to close.

Future VA loan use – Allowing assumptions can limit the seller’s ability to reuse their VA benefits depending on circumstances.

Variable lender rules – Each mortgage servicer can impose their own credit/income requirements for assumptions.

Scarcity of assumable loans – It takes legwork to find available low-rate mortgages able to be assumed.

As you can see, there are advantages but also limitations when it comes to VA loan assumptions. The keys are understanding the tradeoffs and setting proper expectations upfront as a buyer.

Next let’s walk through exactly how the VA assumption process works from start to finish.

How Does the VA Assumption Process Work?

Assuming an existing VA loan has some key differences compared to the traditional mortgage process. Here are the basic steps:

1. Find an Assumable Loan

The first challenge is locating available VA mortgages open to assumption. More on the strategies for this later.

2. Review Loan Terms & Rates

What is the interest rate, loan balance, monthly payment, etc? Make sure the loan details align with your homebuying goals.

3. Submit an Application to Assume

Work with the mortgage servicer to submit documents and get formally approved.

4. Get Appraised If Desired

The buyer can pay for an appraisal to establish the home’s current value.

5. Pay Seller’s Equity

Bring funds to closing to pay off the seller’s equity and facilitate the transfer.

6. Transfer Responsibility

Legal ownership moves from seller to buyer with the loan obligation.

As you can see, the core steps focus on finding an assumable loan, getting approved, and transferring responsibility for the mortgage.

Now let’s take a closer look at each stage of the process.

Step 1: Find an Assumable VA Mortgage

The first challenge is finding an eligible VA loan that the seller is open to allowing you to assume. Here are some tips for locating assumable mortgages:

• Check real estate listings – Some sellers advertise the assumable loan to attract buyers
• Ask your agent – A good realtor can search for assumable loans in the MLS
• Look for low rates – Loans under 5% are likely VA and assumable
• Target foreclosures – Banks sometimes auction assumable VA loans

Cast a wide net in your search, because available deals are limited. Once you find a candidate loan, it’s time to dive into the details.

Step 2: Review Loan Terms & Rates

Work with the seller and/or servicer to obtain full loan details, including:

• Interest rate – Ideally as low as possible to maximize savings
• Loan balance – The lower the better to reduce your payment
• Loan type – Fixed, ARM, etc based on your preferences
• Monthly payment – Ensure it fits your budget
• Due date – Make sure payments are current

Assess if the loan fits your homebuying goals in terms of affordability. Also consider the home itself – does it meet your wants and needs?

If so, it’s time to proceed with getting approved to assume the mortgage.

Step 3: Submit an Application to Assume

The servicer holding the loan will have their own application process to take over an existing VA mortgage. Here are some common requirements and guidelines:

• Credit score – Often 640+ is preferred, but not strictly required
• Income/employment – Should be sufficient to support payments
• Debt-to-income ratio – Typically capped around 50%
• Assets – May want reserves, down payment funds, etc

The servicer needs to approve you as qualified to assume the obligation of the VA mortgage. Having an experienced loan officer guide you through this process is extremely helpful.

Step 4: Get Appraised If Desired

An appraisal is not required for a VA loan assumption, but the buyer may want to get one done. This verifies the home’s current market value for a few reasons:

• Support the price if assuming from a family member
• Confirm appreciation if paying the seller’s equity
• Check for issues that may have decreased the value

Shop around for a certified appraiser to get an objective assessment. Expect to pay ~$500-$600 for a standard appraisal.

Step 5: Pay Seller’s Equity

Before the home can change hands, the buyer has to pay off the seller’s equity. For example:

• Home market value: $300,000
• Seller’s mortgage balance: $200,000
• Seller’s equity: $100,000

The buyer needs $100k+ at closing to pay the equity and make the assumption feasible for the seller. There are a few options to obtain the funds:

• Cash – Have sufficient funds in your accounts
• Secondary financing – A piggyback loan or HELOC
• Gift funds – From family, employer, etc.

Work with your lender to determine the most viable approach based on your finances. Having enough to pay the equity is key for the