How Do Assumable VA Loans Work? A Complete Guide

Assumable VA loans are an intriguing option for both buyers and sellers in today’s housing market With mortgage rates rising, VA loan assumptions provide a way for buyers to take over an existing low rate mortgage and save significantly on their monthly payments. For sellers, they offer a chance to market their home as having an assumable VA loan, making it potentially more attractive to buyers.

In this comprehensive guide, we’ll break down exactly how VA loan assumptions work, who can assume a VA loan the pros and cons and everything else you need to know about this unique home financing option.

What is a VA Loan Assumption?

A VA loan assumption allows a home buyer to take over the mortgage of the current VA homeowner. This means assuming the remainder of their loan balance, their interest rate, and their monthly payments.

Rather than taking out a new mortgage at current market rates, the buyer inherits the terms the seller locked in originally This can lead to considerable savings if the seller has an older VA loan with a low interest rate

For example, let’s say a VA loan holder has a $200,000 balance remaining at 3.5% interest. If a buyer assumes that loan, they take over those exact terms rather than getting a new mortgage at today’s rates of 6% or higher.

VA loans have always been assumable, making them different than conventional mortgages. But assumptions have garnered more interest lately as rates have risen, given the chance for buyers to lock in a low rate.

Are All VA Loans Assumable?

Yes, all VA loans are assumable regardless of when they were originated. It’s a unique benefit available with any VA mortgage, unlike most other loan types.

Certain requirements still apply depending on factors like the buyer’s finances and whether they’re a veteran. But the loan being a VA mortgage means it can be assumed.

This applies to:

• VA loans used to purchase a home
• VA cash-out refinance loans
• VA streamline refinance loans
• Fixed-rate VA loans
• Adjustable-rate VA loans

In other words, any active VA mortgage loan can be assumed by a qualified buyer.

Who Can Assume a VA Loan?

The buyer does not need to be a veteran to assume a VA loan. The key requirements are:

• Credit – Most lenders require a 620 minimum credit score.
• Income – Enough income to support the monthly payments.
• VA Funding Fee – 0.5% of the loan amount, paid upfront.

As long as the buyer meets those qualifications, veterans and non-veterans alike can assume an eligible VA mortgage.

That opens up VA loan assumptions to a wider audience. Buyers who don’t qualify for a VA loan themselves can still tap into one through an assumption.

The VA Loan Assumption Process

If you want to assume a VA mortgage, the process includes:

1. Finding a Home With an Assumable Loan – Work with a real estate agent or review listings yourself to find opportunities. Sellers sometimes advertise if their home has an assumable VA loan.

2. Reviewing Loan Terms – Make sure the mortgage balance, interest rate, and payments fit your budget and goals. Also confirm the home itself meets your needs.

3. Submitting an Application – Work with the lender to provide documents verifying income, assets, credit, and overall qualifications to assume.

4. Obtaining Approval – If approved, continue through the closing process as you would with a normal purchase. Make sure to obtain a release of liability from the seller’s lender.

5. Paying the Funding Fee – You’ll owe a 0.5% funding fee on the remaining loan balance, paid at closing.

Then you take over as the new borrower, inheriting the seller’s outstanding loan amount, interest rate, term length, and monthly payments.

Pros and Cons of VA Loan Assumptions

VA loan assumptions offer benefits but also potential drawbacks to consider:

Pros

• Lower interest rate than current market rates
• Typically fewer closing costs than a new purchase
• Buyer can obtain a low VA rate even if they don’t qualify themselves
• Seller can market their home as having an assumable loan

Cons

• Seller remains liable unless released by the lender
• Can be harder to find assumable loans compared to regular listings
• VA entitlement may remain tied up for sellers if assumed by a non-veteran
• Loan must be assumable (most conventional loans are not)

Can The Original Borrower Be Released?

When a VA loan is assumed, the original borrower remains liable for the mortgage even though they no longer own the home. This liability continues until the lender formally releases them.

Before agreeing to an assumption, the original homeowner will want to verify that the lender is willing to provide a release from liability when requested. This helps ensure the seller won’t be impacted if the new borrower is unable to make payments.

Releasing original borrowers from liability is common with VA assumptions. But it’s still important for sellers to confirm upfront. Otherwise, they could face financial consequences if the new borrower defaults.

How Does It Impact The Veteran’s Entitlement?

Active duty service members, veterans, and surviving spouses have VA home loan entitlement they can use to obtain a VA mortgage with no down payment.

When a qualified veteran assumes the loan of another veteran, they can formally substitute their entitlement. This releases the original veteran’s entitlement so they can reuse it for another VA loan in the future.

However, if a non-veteran assumes the loan, the original veteran’s entitlement remains tied to that mortgage. Their entitlement won’t be restored until the loan is fully paid off by the assuming borrower.

This impacts veterans differently depending on their plans to reuse their VA home loan benefit. Veterans who don’t intend to get another VA loan may be fine allowing assumptions to non-veterans. But for a veteran who wants to buy again, substitution of entitlement is ideal.

Tips for Finding Assumable VA Loans

Your first step is identifying available VA loans that can be assumed. Here are some tips:

• Ask your real estate agent to keep an eye out for VA assumption opportunities.

• Broaden your online search beyond just MLS listings to sites like Zillow, Trulia, and others.

• Look for homes marketed as having assumable loans, which indicates the seller is open to it.

• Widen your geographic scope for more options.

• Consider contacting sellers of homes with VA loans to ask if they would allow an assumption.

While it takes some effort to find assumable VA loans, they provide a unique opportunity to secure a low rate even in a higher rate environment.

Alternatives to VA Loan Assumptions

If assuming a VA loan ultimately doesn’t work for you, other options include:

VA Purchase Loan – If qualified, veterans and military spouses can still opt for a no-down-payment VA mortgage to buy a home. Rates will be higher than assumptions but lower than conventional loans.

Conventional 97 – Putting just 3% down on a conventional loan while avoiding mortgage insurance. More flexibility than VA but requires a down payment.

FHA Loan – Only a 3.5% down payment and easier qualifying standards. But comes with mortgage insurance.

USDA Loan – No down payment loans for low- to moderate-income borrowers in rural/suburban areas. Limited availability compared to VA loans.

Down payment assistance programs – State and local programs providing down payment or closing cost grants to qualifying buyers. Allows them to buy with less cash out of pocket.

The Bottom Line

VA loan assumptions allow buyers to take over the current VA mortgage of a homeowner. This provides the opportunity to assume a low interest rate and obtain a VA loan even if not qualified outright. It’s a unique option but not right for every buyer or seller. Learning the details of how assumptions work allows you to decide if it’s a good fit for your situation.

Frequency of Entities:

VA loans: 26
VA loan: 22
assume: 11
assumption: 10
veteran: 9
entitlement: 7
borrower: 6
lender: 5
interest rate: 4
qualify: 3
real estate agent: 3
monthly payments: 3
liability: 2
conventional: 2
down payment: 2
released: 2
funding fee: 2
non-veteran: 2
approved: 1
mortgage insurance: 1
USDA: 1
FHA: 1