Everything You Need to Know About Assumption of VA Loans

Assuming a VA loan can be a great way for homebuyers to purchase a home with little money down and at a low interest rate. With mortgage rates on the rise, being able to assume someone else’s low rate through a VA loan assumption is an intriguing opportunity.

In this comprehensive guide, we’ll explain what a VA loan assumption is, who is eligible, the pros and cons, and how the process works Whether you’re a buyer looking to assume a loan or a seller hoping to pass your home and loan on to the next owner, this article will provide key information you need to know about assumptions of VA loans.

What is a VA Loan Assumption?

A VA loan assumption allows an eligible buyer to take over the mortgage of a homeowner with an existing VA loan. Instead of getting their own new loan for the purchase, the buyer “assumes” the original VA loan, taking over the remaining balance, interest rate, and monthly payments.

The buyer becomes responsible for making the monthly mortgage payments and adhering to the loan terms going forward. At the same time, the original VA borrower is released from liability on the loan.

Essentially, the buyer is stepping into the shoes of the current homeowner and inheriting their active VA mortgage. This presents opportunities for both buyers and sellers.

The Benefits of Assuming a VA Loan

There are a few key benefits that make assuming a VA loan attractive to both buyers and sellers.

For Buyers

• Lower Interest Rate – When rates rise, assumptions allow buyers to take over a lower rate from years past, saving potentially hundreds per month.

• Lower Fees – Assumptions skip many fees that come with a traditional mortgage, like application fees, underwriting costs, and more.

• Less Cash Needed – Buyers may also avoid down payment costs by assuming a loan with remaining equity.

For Sellers

• Faster Sale – Assumptions can make homes more attractive to buyers, expediting the sale.

• Higher Price – Homes with assumable low-rate loans can command a premium.

• Less Hassle – Sellers avoid stresses of new buyer financing falling through.

Overall, assumptions offer opportunities for buyers and sellers alike in higher rate environments.

Who is Eligible to Assume a VA Loan?

The eligibility requirements to assume a VA loan are generally less strict than those to obtain a new purchase loan. Here is who can qualify:

• Veterans – Veterans are eligible to assume a VA home loan. If they have available entitlement, they can substitute it for the seller’s.

• Active duty service members – Those currently serving can assume a VA loan as well.

• Surviving spouses – Surviving spouses of eligible Veterans can also assume VA loans in some cases.

• Non-veterans – Civilians who are not Veterans are also permitted to assume VA loans. However, there are risks, which we’ll cover shortly.

The assumer just needs to meet the lender’s credit and income requirements, which are typically less stringent than purchasing a home with a new VA loan.

The VA Loan Assumption Process

If you’re interested in having your VA loan assumed, either as the buyer or seller, here is an overview of how the process works:

• Find an Assumable Loan – Buyers work with a realtor or research sites directly to find homes with assumable mortgages. VA and FHA loans can potentially be assumed.

• Review Loan Terms – The buyer reviews the loan’s unpaid principal balance, interest rate, and other terms to determine if assumption makes sense.

• Submit an Application – The buyer completes an assumption application and provides any required financial documentation to the loan servicer.

• Get Approved – The servicer reviews the application and notifies the buyer if they are approved within 45 days.

• Determine Equity Payment – The seller and buyer agree on a payment amount to cash out the seller’s home equity at closing.

• Close on the Assumption – Final loan assumption documents are signed to transfer ownership, release the seller from liability, and add the buyer to the loan.

• Pay Remaining Fees – The buyer pays any applicable closing fees, like the 0.5% VA funding fee on the loan balance.

And with those final steps, the home and VA loan are successfully transferred to the new buyer!

Pros and Cons of Assuming a VA Mortgage

Assuming a VA loan has several benefits for both buyers and sellers, but there are also some potential drawbacks to keep in mind.

Pros for Buyers

Lower Interest Rate – Assumers get the original homeowner’s potentially much lower rate, saving substantially each month.

Minimal Fees – Assumptions skip lender fees for underwriting, applications and more that come with a new home loan.

No Down Payment – Buyers may avoid a down payment if the seller has enough home equity.

Quicker Process – Assumptions can close quicker than traditional financing that requires underwriting.

Cons for Buyers

Equity Payment – The buyer often needs to make a large cash payment to the seller to pay out their equity.

Missed Out on Declines – Some buyers may rather wait for prices to fall than assume a loan at the peak.

Risks from Old Loans – There can be unknown issues with older loans that require servicing fixes.

Rising Payments – Loan payments may rise if the loan has an adjustable rate in the future.

Pros for Sellers

Faster Sale – Homes can sell quicker by avoiding buyer financing issues.

Higher Prices – Low rates make homes more appealing, garnering higher sale prices.

Added Leverage – Flexibility around terms appeals to buyers, creating leverage in negotiations.

Fewer Headaches – Sellers avoid frustrations resulting from buyer financing problems.

Cons for Sellers

Lost Future Equity – Sellers lose out on equity gains if prices later rise more.

Miscalculated Payoff – If equity calculations are off, the seller may not get their full equity payoff amount.

Risks Without Substitution – Letting a non-Veteran assume the loan puts entitlement at risk.

Taxes – Cash-out equity payments may come with tax implications in some cases.

As you can see, there are compelling advantages but also important considerations around assuming VA loans.

Can Civilians Assume VA Loans?

Yes, civilians who are not Veterans themselves can assume VA loans. However, there are risks for Veteran sellers allowing non-Veterans to take over their loan:

• The homeowner’s VA entitlement will remain tied up in the loan until it’s paid off. This can limit their ability to reuse the benefit.

• If the assumer experiences a foreclosure or short sale down the road, the seller’s entitlement is lost.

• The seller misses the opportunity to free up their entitlement for reuse if home values rise substantially later.

For these reasons, many sellers prefer assumptions only by creditworthy Veterans who will substitute their entitlement. But civilian assumptions are allowed if sellers accept the risks.

How to Find Homes with Assumable VA Loans

If you want to assume a VA loan, the first step is finding available homes with assumable mortgages. Here are some tips for locating them:

• Check MLS Listings – Realtors with access to MLS data can search for listings based on assumable loan types.

• Look for Listing Mentions – Many homeowners advertise an assumable VA or FHA loan in the listing description to attract buyers.

• Ask Around – Speaking with realtors and lenders in your area can lead to potential leads on assumable loans.

• Contact Listing Agents – Reach out to agents of appealing listings to ask if the loan can be assumed.

• Search Online Ads – You may find homes marketed as “VA assumable” or “low VA rate assumable” on popular listing sites.

With the right approach, buyers can find VA loans meeting their needs that make great assumption opportunities.

Alternatives to Assuming VA Loans

Assuming a VA loan isn’t the only option for potential buyers. Here are a few other routes to consider:

• VA Streamline Refinance – Refinancing an existing VA loan at a lower rate through the IRRRL program is simple with minimal documents.

• VA Cash-Out Refinance – Veterans with equity can tap cash at closing through a VA cash-out refi to fund a down payment on a new home.

• Conventional Loan – some borrowers may still opt for a conventional loan depending on factors like rate/term comparisons.

• FHA Loan – FHA allows for low down payments with less entitlement risks for Veterans.

• Down Payment Assistance – State and local groups provide grants for down payments that