Are VA Home Loans Assumable? What Borrowers Need to Know

VA home loans have a unique benefit that sets them apart from conventional loans – they are assumable. This means under certain conditions, a buyer can take over the mortgage of the current VA homeowner

This article will explain what loan assumption is, who can assume a VA loan, the process, pros and cons, and steps for both buyers and sellers.

What is a VA Loan Assumption?

A VA loan assumption allows a buyer to “assume” or take over the current mortgage of a VA homeowner when purchasing their home.

The buyer takes on all rights and responsibilities of the mortgage. including

• The remaining loan balance
• Interest rate
• Monthly principal and interest payments
• Loan term

Essentially the buyer steps into the shoes of the current homeowner.

The seller is released from liability on the mortgage once the assumption goes through.

Who Can Assume a VA Mortgage?

The good news is you do not have to be an eligible Veteran to assume a VA loan. Both Veterans and civilians can assume a VA mortgage, as long as they meet credit and income requirements.

However, there can be drawbacks for the Veteran seller if a civilian assumes their loan, which will be covered later.

The Benefits of VA Loan Assumptions

Assuming a VA loan can provide major savings for the buyer compared to taking out a new loan. Here are some of the biggest benefits:

Lower Interest Rate

The buyer will receive the home seller’s interest rate, which is likely much lower than current rates. Rates on 30-year fixed VA loans have ranged from 3-4% over the past couple years.

Today, rates on new loans are over 7% on average. By assuming an existing VA loan, the buyer locks in a lower rate and payment.

Lower Fees

Closing costs and fees on a new VA mortgage generally run 2-5% of the total loan amount. These include the funding fee, appraisal, credit check, and more.

With a VA assumption, buyers only pay a 0.5% VA funding fee based on the loan balance. Appraisals and credit checks are not required in most cases.

This saves buyers thousands in closing costs on a $300,000 or $400,000 mortgage.

The Drawbacks of VA Loan Assumptions

While assumptions offer advantages, there are also risks for buyers and sellers to consider:

Home Equity Payoff

In order for an assumption to make sense for the seller, the buyer must pay off their home equity at closing.

For example, if the seller has $100,000 in equity, the buyer needs to bring that money to closing to pay the seller. This is likely the biggest hurdle for most buyers hoping to assume a loan.

VA Entitlement

For Veteran sellers, allowing a civilian to assume their loan has risks. Their VA entitlement will remain tied up until the loan is paid off.

This makes it harder for the Veteran to purchase another home using their VA benefits in the future. They may no longer have enough entitlement remaining for another $0 down VA loan.

If the civilian buyer defaults down the road, the Veteran seller could lose their entitlement for good.

The VA Loan Assumption Process

The process to assume a mortgage will depend on the loan servicer. Here are the general steps:

1. Find Homes with Assumable Loans

• Work with a real estate agent to identify listings with VA loans that can be assumed. VA and FHA loans are typically assumable.

• Some home sellers will advertise an assumable mortgage in the listing details to attract buyers.

2. Submit an Assumption Application

• The buyer and seller must complete an application provided by the mortgage servicer to start the process. This commits the buyer to assume the loan.

3. Underwriting and Credit Review

• The servicer will underwrite the buyer just like any other VA loan to ensure they are creditworthy. Minimum credit scores and debt-to-income ratios apply.

• If needed, the buyer may provide updated income and asset documentation.

4. Home Appraisal

• In some cases the servicer may require an appraisal. This helps ensure the buyer is not paying more than the home is worth.

5. Closing and Loan Assumption

• At closing, the buyer makes their down payment to the seller to buy out their home equity.

• The 0.5% VA funding fee is also collected from the buyer and paid to the VA.

• Ownership changes hands and the seller is released from the mortgage.

Now the buyer has assumed the current VA loan!

5 Tips for Buyers Looking to Assume a VA Loan

Here are a few tips for buyers interested in taking over the mortgage of a VA home:

• Get pre-approved to show sellers you can qualify for an assumption. Lenders will want to see a 620+ credit score and stable income.

• Make sure you can cover the seller’s equity payoff at closing in cash or with secondary financing. This can easily be tens of thousands of dollars.

• Hire a real estate agent experienced with VA loans. Not all agents are well-versed on rules for assumptions.

• Be ready to close in 30 days or less. The mortgage servicer will want to complete the assumption quickly after approving you.

• Understand the servicing change. You will now send mortgage payments to the servicer and follow their policies.

4 Tips for VA Homeowners Considering a Loan Assumption

If you currently have a VA mortgage, here are key things to keep in mind if selling your home to a buyer who wants to assume your loan:

• Screen potential buyers to ensure they can qualify financially for your mortgage. You don’t want to waste time on buyers who can’t assume your loan.

• Require at least a 3-5% down payment from the buyer to compensate for your home equity. More is better to reduce risk.

• Only allow assumption by another eligible Veteran who will substitute their entitlement. This releases your entitlement for future use.

• Consult a real estate attorney. An assumption involves complex legal documents between you, the buyer, and mortgage servicer.

The Bottom Line

VA loan assumptions can be a win-win for both buyers and sellers when executed properly. Buyers save significantly on upfront fees and interest rates compared to a new mortgage.

Meanwhile, sellers can negotiate a higher home sales price by offering their low VA rate for assumption. This fast tracks their equity payoff.

As with any real estate transaction, work closely with your real estate and legal professionals to navigate the VA assumption process. Make sure all parties fully understand the benefits and drawbacks before moving forward.