Everything You Need to Know About Assumable VA Mortgage Loans

VA mortgage loans have a unique feature that sets them apart from conventional loans – they are assumable. This means that the loan can be transferred to a new borrower who takes over the payments. Assumable VA loans provide opportunities for both buyers and sellers in a rising interest rate environment. In this comprehensive guide, we will explain what an assumable VA loan is, who can assume one, the process for assuming a loan, the pros and cons, and more.

What is an Assumable VA Mortgage Loan?

An assumable mortgage is one that can be taken over or “assumed” by a new borrower. The new borrower takes on the original loan terms instead of having to qualify and close on a brand new loan. This means they also take on the same interest rate loan balance, and monthly mortgage payment.

VA loans can be assumed by eligible borrowers thanks to the VA’s guidelines. The VA loan program allows a non-veteran to assume the loan from a veteran This is different than other government loans like FHA loans, which typically can only be assumed by borrowers who meet FHA eligibility requirements.

Who Can Assume a VA Mortgage Loan?

The original VA loan borrower must be a qualified veteran who meets the VA’s eligibility criteria. However, the new borrower assuming the loan does not need to be a veteran or meet any military service requirements. The new borrower simply needs to qualify from a credit and income standpoint with the mortgage lender.

Here are some common requirements lenders look for:

• Credit score of 620 or higher
• Stable income to support the loan payments
• Clean credit history
• Sufficient assets for down payment if required

Each lender will have their own set of qualification standards, so it’s important to check on requirements before pursuing a VA loan assumption.

The Process for Assuming a VA Mortgage Loan

If you find a home you want to buy that has an assumable VA loan, here is an overview of the process:

• Find a home with an assumable VA loan: You can work with a real estate agent to locate VA loan listings in the MLS. Or search for listings yourself that advertise the assumable loan feature.

• Check your eligibility: Speak with the lender and provide documents to show you meet credit, income, and asset requirements to assume loan.

• Get approval from lender: After reviewing your application and documents, the lender will let you know if you are approved to assume the loan.

• Pay required fees: You will need to pay the VA funding fee, which is 0.5% of the outstanding loan balance. Appraisal and other closing costs are not required.

• Execute assumption: Meet all requirements from lender, pay fees, and sign assumption paperwork to formally take over the loan.

• Obtain release of liability: Make sure the seller requests a release of liability from lender to transfer all responsibility to you.

The timing can vary from a few weeks to over a month depending on the lender and their process. Make sure to get all your paperwork and financials in order upfront to help speed things along.

Pros of Assumable VA Loans

There are some nice perks to assuming an existing VA loan, including:

• Lower interest rate: You can take advantage of low rates from years past that you can’t get today. This provides significant monthly savings.

• Lower fees: Much lower funding fee and no appraisal cost compared to a new VA loan.

• Fast process: An assumption can close quicker than a regular purchase since it’s less paperwork.

• Flexibility: Open to veterans and non-veterans. Prequalification process is typically less stringent.

For buyers, lower costs and the ability to lock in a low rate are the two biggest advantages. For veterans selling, being able to market the assumable loan can make the home more attractive.

Cons of Assumable VA Loans

There are also some potential drawbacks to weigh:

• Limited inventory: It can be difficult finding homes with assumable VA loans. Many sellers don’t want to give up their low rate.

• Equity payoff: The buyer has to come up with the funds to pay the seller their equity in the home.

• Loss of entitlement: The seller’s VA entitlement stays with the home if assumed by a non-veteran.

• Release of liability: Seller remains liable until obtaining approved release from lender.

While assumptions can make homebuying easier and more affordable, buyers need to find available inventory and pay the seller’s equity. Veterans also risk losing their VA entitlement, so it’s a decision not to take lightly for sellers.

Tips for Getting an Assumable VA Mortgage Loan

If you want to pursue an assumable VA loan as a buyer, here are some tips:

• Contact lenders that handle VA loans and understand the assumption process. Some lenders are more familiar than others.

• Ask your real estate agent to search for “VA assumable” listings and homes with VA loans.

• Expand your home search area to increase chances of finding assumable VA loan homes.

• Have funds lined up to pay off the seller’s equity, such as cash, retirement funds, gift from family, etc.

• Work quickly once you find an assumable home, as there is likely competition from other buyers.

• Get all your financial paperwork ready upfront for the lender to review your eligibility.

As a seller, tips include:

• Ask your lender about their requirements and process for approving assumptions.

• Highlight the assumable VA loan feature clearly when marketing your home.

• Consider an appraisal to determine your home equity so you know the payoff amount.

• Screen potential buyers and make sure they are qualified with the lender before accepting an offer.

• Obtain a release of liability from lender as soon as possible after the assumption.

The Bottom Line

Assumable VA loans provide unique opportunities for both buyers and sellers. Buyers can tap into low rates they can’t obtain today while saving on costs. Sellers can leverage their low rate loan to attract buyers. While assumptions aren’t for everyone, they are worth consideration if you want to maximize benefits of VA financing.