A VA assumable loan allows a qualified buyer to take over the mortgage of a homeowner with an existing VA loan. This can be an excellent option for buyers looking to enter the housing market when interest rates are high. VA loans have historically had lower interest rates than conventional mortgages, so assuming a loan can save buyers thousands of dollars over the life of the loan.
In this comprehensive guide we’ll explain everything you need to know about VA assumable loans and how the process works from start to finish.
What is a VA Assumable Loan?
A VA assumable loan, also called a VA loan assumption, allows a buyer to assume the mortgage of the seller instead of obtaining their own mortgage. This means the buyer takes over the original loan terms, including the interest rate, loan balance, and monthly payments.
The Department of Veterans Affairs (VA) guarantees the loans, but commercial lenders like banks and mortgage companies issue them. VA loans are only available to eligible veterans, active-duty service members, and surviving spouses. But the VA allows non-veterans to assume them as well.
How Do VA Assumable Loans Work?
When a buyer assumes a VA loan, they take over the monthly payments without having to qualify or go through underwriting again. Here are the basics of how it works:
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The buyer and seller agree to the assumption. The original VA borrower must agree to allow the buyer to assume their mortgage.
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The buyer applies to assume the loan. The buyer completes an application with the lender to take over the payments.
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The lender reviews the buyer’s eligibility, The lender ensures the buyer is financially qualified to make the monthly payments
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The buyer makes a down payment to the seller. This gives the seller their equity earned in the home.
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The loan transfers at closing. The buyer begins making the monthly payments at the existing rate and term.
VA loans can be assumed an unlimited number of times if borrowers continue to qualify The process is much simpler than a traditional mortgage closing because there’s less paperwork.
What Are the Benefits of a VA Assumable Loan?
There are several advantages to assuming a VA loan rather than taking out a new mortgage:
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Lower interest rate – Buyers can lock in rates often 2-3% lower than current market rates. This results in hundreds of dollars in savings each month.
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Less cash needed – Assumptions require less money down since there are no loan origination fees. Buyers only need funds to pay the seller’s equity.
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Shorter closing – Much of the paperwork and underwriting is avoided, allowing for a shorter closing period.
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Easier to qualify – Lenders use less stringent criteria when approving assumptions versus new mortgages. Minimum credit scores are lower.
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Payoff not required – Buyers can assume the existing loan without having to pay off the entire balance.
For buyers struggling to save a down payment or qualify for a new loan, assumption provides an easier pathway to homeownership.
VA Loan Assumption Eligibility
The VA has guidelines lenders must follow to approve assumptions, although each lender also institutes their own requirements. Here are some of the key criteria buyers must meet:
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Credit score – Most lenders require a minimum credit score between 580 and 620 for an assumption.
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Debt-to-income ratio – Your total monthly debt payments, including the new mortgage payment, typically cannot exceed 41% of your gross monthly income.
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Loan-to-value ratio – The balance of the loan must be equal to or lower than the home’s appraised value.
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Stable income – You must document steady income from employment, benefits, retirement, or other sources.
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Cash for down payment – Funds available for a down payment to pay off the seller’s equity.
Meeting these requirements demonstrates you can manage the financial obligation of the mortgage. VA loans are less strict than conventional loans.
How to Find a VA Assumable Loan
VA assumable loans aren’t openly advertised, so finding one requires effort. Here are some tips:
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Contact mortgage brokers who work with veterans. Brokers have access to loan inventories not listed publicly.
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Search property listings for the words “assumable VA loan” or “owner financing.” Some sellers will advertise assumability.
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Work with a real estate agent who understands VA loans. Ask them to keep an eye out for VA assumptions.
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Look for FSBO (for sale by owner) listings. Homeowners selling on their own are more likely to consider assumptions.
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Talk to homeowners in your network who have VA loans. See if they would let a buyer assume their current mortgage.
With persistence and a good agent on your side, it’s possible to locate a home with an assumable VA loan.
The VA Assumption Process Step-by-Step
If you find a candidate for a VA assumption, here is how the process plays out:
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Consult with a lender. A lender specializing in VA loans can guide you through the assumption process. Provide details on the loan you want to assume.
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Submit a loan application. The lender will have you complete a loan application providing financial, employment, and identification details.
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Get pre-approved. The lender reviews your eligibility and issues a pre-approval letter if you meet requirements. This states the loan amount you qualify to assume.
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Make an offer. Present the seller with a purchase offer along with the pre-approval letter. This kicks off negotiations.
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Reach sales agreement. You and the seller come to terms on a sales price and agree to the assumption.
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Make down payment. At closing, you pay the seller their equity with a down payment minus closing costs.
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Transfer property and loan. You take ownership and begin making the mortgage payments under the original loan terms.
Working with a real estate professional makes the assumption process smooth and stress-free.
Pros and Cons of VA Assumable Loans
VA loan assumptions have benefits, but also some potential drawbacks to consider:
Pros
- Lower interest rates
- Smaller down payments
- Limited credit check
- Faster closing time
- Lower monthly payments
Cons
- Limited inventory
- Need cash for down payment
- No home customization
- Inherit existing home issues
- Difficult to locate
Assuming a VA loan saves substantially on interest over the long run. But finding the right opportunity can take time.
FAQs About VA Assumable Loans
Here are answers to some common questions about VA assumptions:
Can a non-veteran assume a VA loan?
Yes. The VA allows both veteran and civilian buyers to assume existing VA loans. But civilians can’t obtain a new VA mortgage.
How much is the VA funding fee for assumptions?
The funding fee is 0.5% of the outstanding loan balance. Only the loan assumer pays this fee to the VA.
Is credit qualification required?
Yes. Lenders will review your credit history, income, and debts to determine if you can manage the monthly payments. Minimum credit scores are around 600.
Can the buyer change the loan terms?
No. The buyer takes on the precise terms, rate, payment amount, and maturity date of the existing VA mortgage. Nothing can be altered.
How long does the assumption process take?
Most assumptions close within 30-60 days since less documentation is required versus a refinance or new purchase.
The Bottom Line
Assuming a VA loan provides an easier pathway to homeownership by allowing buyers to take over an existing VA mortgage. This avoids the stringent approval process and high rates for new loans. Buyers benefit from the original low rates locked in by the current homeowner years ago.
While it takes effort to find a VA loan assumption opportunity, the mortgage savings make it worthwhile. Veterans with VA loans also benefit by being able to sell their home faster.