Everything You Need to Know About Assuming a VA Loan

Assuming a VA loan can be an attractive option for both buyers and sellers in certain housing markets. With mortgage rates rising in 2022, VA loan assumptions are starting to generate more buzz and interest.

But what exactly does it mean to assume a VA loan? How does the process work? And is it really a smart move? This comprehensive guide will explain everything you need to know about assuming a VA mortgage.

What is a VA Loan Assumption?

A VA loan assumption allows a buyer to take over the existing VA mortgage of a seller. Instead of having to get approved and qualify for a brand new loan, the buyer “assumes” the original VA loan complete with its interest rate and remaining term.

It’s essentially a way for a buyer to inherit the low interest rate on an older VA mortgage originated when rates were lower, The buyer takes over the monthly payments and all other obligations of the loan from the original borrower

VA loans are assumable because it’s part of the original VA loan guarantee that backed these mortgages. As long as lenders follow the VA’s assumption guidelines and the buyer qualifies, the buyer can assume the VA loan.

Who Can Assume a VA Mortgage?

Veteran status is not required to assume a VA loan. The VA allows both veterans and non-veterans to take over an existing VA mortgage through its loan assumption program.

Lenders will evaluate assumption applicants based on certain credit standards and their ability to afford the monthly payments on the loan being assumed So you don’t have to be an eligible veteran to assume a VA loan, but you do have to meet the lender’s qualification requirements

The Pros and Cons of Assuming a VA Mortgage

Just like any major financial move, taking over someone’s VA loan has both advantages and potential drawbacks. As a buyer, you need to weigh these considerations carefully.

Pros for VA Loan Assumers

Lower Interest Rate – Assuming an older VA mortgage can allow you to lock in a low fixed rate that is likely much lower than current market rates on new loans. This results in a lower monthly payment.
Limited Fees – Assuming a loan is less expensive than getting a new mortgage. You avoid lender fees, appraisal fees, and other closing costs outside of a 0.5% VA funding fee.
Faster Process – Since you aren’t applying and waiting to get approved for a new mortgage, the loan assumption process is typically much quicker.

Cons for VA Loan Assumers

Cash to Close – To assume a loan, you’ll likely need to bring substantial cash to close to buy out the seller’s home equity. This can be tens of thousands of dollars.
Qualification Not Guaranteed – Even if you find a homeowner with an assumable VA loan, there is no guarantee you will meet the lender’s qualification requirements to take over the mortgage.
Risks for Sellers – Sellers who allow buyers to assume their VA loan can get hit with drawbacks related to their VA entitlement.

Pros for VA Sellers

Expanded Pool of Buyers – Being able to market an assumable VA loan with a low rate can expand the pool of interested buyers. This can lead to a faster sale and multiple offers.
Higher Home Price – Buyers may be willing to pay more for a home with an assumable mortgage given the savings and benefits.

Cons for VA Sellers

Risks to Entitlement – Allowing a non-veteran to assume your VA loan puts your remaining VA entitlement at risk if they default on the mortgage later.
No Home Sale Proceeds – With an assumption, the seller receives no proceeds from the home sale. They get their equity paid out, but no profit from a higher home sale price.

Clearly there are advantages and risks to weigh on both sides of a VA loan assumption transaction. Doing thorough research beforehand is crucial.

How Does the VA Loan Assumption Process Work?

The process to assume an existing VA mortgage will vary somewhat depending on the lender that holds the original loan. But in general, here are the typical steps:

Find an Assumable Loan – The buyer needs to locate a VA loan held by a homeowner who is open to allowing an assumption. Real estate agents can help with this search if the loan status isn’t advertised.
Review Loan Documents – The buyer reviews the details of the loan being assumed, including the interest rate, loan balance, monthly payments, and term remaining.
Negotiate Sale Terms – The buyer and seller have to agree on a purchase price and how much the buyer needs to pay upfront to the seller to buy out their home equity.
Compile Assumption Application – The buyer provides the lender all required documents and fills out an application to assume the mortgage.
Lender Review and Approval – The lender reviews the application and makes sure the buyer qualifies for the VA loan assumption based on VA and lender guidelines.
Close on the Loan Assumption – At closing, the buyer pays the 0.5% VA funding fee and equity payout. Ownership is transferred.
Start Making Payments – The buyer begins making the ongoing monthly mortgage payments on the assumed loan.

VA loan assumptions must be approved by the servicer of the original loan. So the lender has discretion based on their own qualification standards and underwriting policies.

VA Loan Assumption Requirements

To be approved to assume an existing VA mortgage, the buyer will have to meet certain requirements that typically include:

Credit Score – Most lenders require at least a 620 FICO credit score. Some require higher scores.
Income Verification – Documented stable income sufficient to afford the monthly payments.
DTI Ratio – A total debt-to-income ratio below 41% in most cases. Depends on the lender.
Sufficient Cash – Funds to pay the VA funding fee and equity payout to the seller.
Clean Credit History – No recent late payments, defaults, or bankruptcy. Requirements vary by lender.

In addition, the buyer will need to occupy the home as their primary residence. Investment or second home assumptions aren’t allowed with VA loans.

Meeting these requirements does not absolutely guarantee approval. But they are good guidelines for the VA loan assumption qualification process.

How to Find an Assumable VA Mortgage

If you’ve decided to pursue a VA loan assumption, the next step is finding an assumable VA mortgage on a home you want to buy. Here are some options to locate assumable loans:

Check real estate listings for any mentions that a VA loan can be assumed. Some sellers advertise this.
Contact real estate agents and tell them you’re looking for homes with assumable financing. An agent can research listings on the MLS.
Look for listings of VA-owned foreclosure homes. These often have assumable mortgages.
Talk to friends or family members with VA loans and ask if they would consider an assumption when they sell.
Search specialized sites like VeteransUnited.com that post articles on assuming VA loans. The ads or comments sometimes note assumable listings.

Casting a wide net using multiple strategies gives you the best chance of finding an ideal home with an assumable VA mortgage.

Can I Refinance an Assumed VA Loan?

Yes, you can refinance a VA mortgage you assumed from the original borrower. VA loans that have been assumed work just like any other VA mortgage when it comes to refinancing.

The most popular refinance option for an assumed VA loan is the Interest Rate Reduction Refinance Loan, or IRRRL. This is the VA streamline program that lets you refinance with limited documentation and no appraisal.

Refinancing an assumed VA mortgage with an IRRRL allows you to lower the interest rate and payment from whatever is on the original assumed loan. You can also shorten or lengthen the term with an IRRRL refi.

The main caveat is that to refinance an assumed VA loan, you have to have made six consecutive monthly payments after taking over the mortgage. This VA requirement applies to refinancing any loan assumption.

Alternatives to Assuming a VA Mortgage

Loan assumptions aren’t the right fit for every buyer and seller situation. It’s important to also consider alternatives like:

VA Purchase Loan – If you’re a veteran, getting pre-approved for a new 0% down VA mortgage may provide more options and control than trying to find and qualify for an assumable loan. Rates are still relatively low by historical standards.

Conventional Loan – Some buyers may prefer a non-VA mortgage option that allows them to avoid the VA funding fee or limitations around future entitlement. Conventional loans are also assumable provided the lender allows it.

Home Equity Loan – Instead of an assumption, sellers can take out a home equity loan or home equity

VA Loan Assumption – Advantages, Disadvantages, Rules & Process | Know Your Benefit

How much does a VA loan assumption cost?

Funding fee: A VA loan assumption will come with a funding fee equal to 0.5% of the loan balance. If you are considering a VA loan assumption as a path to homeownership, then meeting the requirements above is a great first step. But keep in mind that each lender has its own standards.

What are the requirements for a VA loan assumption?

Income: You’ll need to have enough income to support the loan amount. Funding fee: A VA loan assumption will come with a funding fee equal to 0.5% of the loan balance. If you are considering a VA loan assumption as a path to homeownership, then meeting the requirements above is a great first step.

What are the benefits of a VA loan assumption?

The other money-saving benefit of a VA loan assumption is that they come with few costs and fees, especially compared to a traditional purchase loan. Most of the closing costs associated with a VA purchase aren’t part of an assumption. The person assuming the loan does pay a funding fee of 0.5 percent of the loan balance.

What if a VA loan is assumed?

When VA loans are assumed, it’s the servicer’s responsibility to make sure the homeowner assuming the property meets both VA and lender requirements. For a VA mortgage assumption to take place, the following conditions must be met: The existing loan must be current. If not, any past due amounts must be paid at or before closing.