Assuming a VA Loan from a Seller: A Complete Guide

Purchasing a home is likely one of the biggest financial decisions you’ll make in your life. For many buyers, qualifying for a mortgage can be challenging, especially with rising interest rates. This is where assuming a VA loan from a seller can be an excellent option.

As a brief overview, assuming a VA loan allows you to take over the existing VA mortgage of the home seller when you purchase their home. This route essentially lets you “inherit” their low interest rate and monthly payments.

In this comprehensive guide, we’ll break down everything you need to know about assuming a VA loan, including:

• What is a VA loan assumption?
• Pros and cons of assuming a VA loan
• How to find VA loans available for assumption
• Step-by-step process to assume a VA mortgage
• Key tips for buyers and sellers

Let’s dive in!

What Exactly is a VA Loan Assumption?

An assumption allows a buyer to take over the VA mortgage of a home seller when purchasing their home. Rather than applying for a brand new loan, you assume the original loan terms including the interest rate and remaining balance.

It’s important to note that the original homeowner must agree to the assumption. As the buyer, you’ll work with their lender to take over monthly payments on the existing VA loan.

VA loans are assumable regardless of whether you’re a veteran or civilian The Department of Veterans Affairs has flexible guidelines around assumptions.

The Pros of Assuming a VA Home Loan

There are some major perks to assuming a VA mortgage that make it an appealing option:

Significant Monthly Savings

This is by far the biggest benefit. You take over the seller’s low fixed rate, which these days is likely 3-5%. Current rates are nearly double that, so you lock in substantial savings each month compared to financing a new purchase.

Avoid Closing Costs

Closing costs for a traditional VA purchase loan can run anywhere from 2-5% of the loan amount. With an assumption, you avoid those costs altogether. The only fee is a 0.5% VA funding fee on the outstanding loan balance.

Fast Closing

Because you aren’t applying for a mortgage, the assumption process is typically much faster. No underwriting or waiting for appraisals. This streamlined path saves you time.

Easier to Qualify

Lenders have more flexible credit guidelines for assumptions. Issues like high debt-to-income ratios may be overlooked if the payment history on the loan has been solid.

The Potential Cons of Assuming a VA Mortgage

Of course, there are also some drawbacks to weigh:

Limited Inventory

The pool of available homes with a VA loan to assume is smaller. Not every VA mortgage out there is eligible for assumption.

Paying for Homeowner Equity

To make the deal worthwhile, the seller will want you to pay them for any equity they have in the home. This could be tens of thousands of dollars or more at closing.

Risks for Veteran Sellers

If a civilian assumes their loan, the veteran seller loses entitlement until it’s paid off. This can limit their ability to reuse the VA loan benefit.

Overall though, the pros tend to far outweigh the cons, especially when rates are high. But assumptions aren’t the right fit for every buyer or situation.

How to Find a VA Loan to Assume

Here are some tips for finding available VA mortgages to assume:

• Work with a real estate agent with access to MLS listings. Ask them to search for listings mentioning loan assumptions.

• Browse major listing sites like Zillow yourself and look for homes advertised as having assumable financing. Sellers often promote this.

• Talk to lenders about what they have available for assumption. Some may specialize more in this area than others.

• Consider seller-financed listings where the homeowner holds the mortgage. Ask if they have a VA loan that could be assumed.

Casting a wide net improves your chances of finding a VA loan assumption opportunity.

Step-by-Step Process to Assume a VA Mortgage

If you find a VA loan you want to assume, here is the general process:

1. Review the Loan Terms

Verify the interest rate, loan balance, monthly payments, and whether the loan is fixed or adjustable. Make sure the terms align with your budget.

2. Submit an Application with the Lender

Work with the lender of record to formally apply to assume the loan. Be prepared to provide financial documents to prove you’re qualified.

3. Negotiate the Home Price

Factor in any equity the seller wants paid out. Will it come from your own funds or a second loan? Getting financing terms can influence the negotiation.

4. Sign an Assumption Agreement

This legally transfers responsibility for the VA loan payments and terms to you. The original borrower is released from liability.

5. Close on the Home Purchase

Finalize the transaction! Record the deed, pay the assumption fee and seller proceeds.

The lender handles most of the heavy lifting, but you should consult a real estate attorney before signing anything.

Tips for Buyers Assuming a VA Mortgage

If you’re considering assuming a VA loan as the buyer, keep these tips in mind:

• Get pre-qualified first so you know your budget and price range. Work with a lender familiar with assumptions.

• Be ready to cover the seller’s equity with cash or secondary financing. Factor this into negotiations.

• Hire a real estate attorney to review the assumption agreement before signing. Make sure you understand the terms being transferred.

• Move quickly if you find a great low rate! Homes with assumptions get snapped up fast in this market.

• Ask the seller to provide a payment history showing on-time payments. This helps the lender approve you.

• See if the seller will agree to a rate lock while the assumption is processed to protect you from any rate jumps.

Tips for Sellers Allowing a VA Loan Assumption

For veterans considering an assumption, keep these tips in mind:

• Consult with the lender upfront to see if your VA loan can be assumed. Not all loans qualify.

• Require the buyer to pay for an appraisal to determine available equity and negotiate accordingly.

• If possible, only allow assumptions to veteran buyers who will substitute entitlement. This protects your reuse of benefits.

• Request a co-signer if the buyer has marginal credit. This reduces risk of default after assumption.

• Work with an attorney to review release of liability once the assumption is finalized.

• Keep paying the mortgage yourself until the assumption closes. Any missed payments can jeopardize the process.

Is Assuming a VA Loan Right for You?

While assumptions aren’t for everyone, they can be a smart move in the right situation. Taking over an older VA mortgage lets you secure an incredibly low fixed rate during times of rising rates and inflated prices.

The buyer avoids heaps of closing costs too. And for sellers, it expands the pool of qualified buyers.

Carefully weigh the pros and cons for your scenario. Consult experienced real estate and lending professionals to guide you through the process. With the right education and support, a VA loan assumption can be a win-win for both buyers and sellers.