How Does an Assumable VA Loan Work? A Complete Breakdown

VA loans are a popular mortgage option for many homebuyers, especially military servicemembers and veterans. One unique benefit of VA loans is that they are assumable, meaning the mortgage can potentially be transferred to a new buyer who takes over the payments. But how exactly does assuming a VA loan work? In this comprehensive guide, we’ll explain the ins and outs of VA loan assumptions.

What is a VA Loan Assumption?

An assumable mortgage is one that can be taken over or “assumed” by a new buyer. The new buyer takes responsibility for making the remaining monthly payments and inherits the interest rate and terms of the seller’s existing VA loan.

With a VA loan assumption, the buyer does not have to qualify for a new mortgage. They simply take over the seller’s loan as-is. The seller gets cashed out for any home equity they have built up.

VA loans are one of the few remaining mortgage types that are assumable. Most conventional and FHA loans today are not assumable.

The Benefits of Assuming a VA Mortgage

There are several potential benefits for both buyers and sellers when it comes to VA loan assumptions

For buyers:

• Lower interest rate – The buyer assumes the seller’s existing rate, which may be much lower than current rates. This saves significantly on monthly payments.

• Lower costs – Assumptions avoid most closing costs and fees associated with a new purchase loan. Buyers pay a one-time VA funding fee of 0.5% of the loan balance.

• Easier to qualify – Buyers only need to prove creditworthiness to the lender, not full VA eligibility.

For sellers:

• Increased home value – A low assumable rate makes the home more valuable to buyers.

• Faster sale – Assumability can help sell the home faster, especially when rates are rising.

• Get cashed out – Sellers receive their home equity at closing when the buyer assumes the loan.

Who Can Assume a VA Loan?

The VA has flexible guidelines around who can assume a VA loan. Unlike taking out a new VA loan, the assumer does not need to be a veteran or meet military service requirements. Even civilians can assume a VA mortgage, as long as they meet the lender’s credit and income requirements.

However, for a veteran selling their home, it is often ideal for another veteran with VA entitlement to assume the loan. That way, the buyer can substitute their entitlement for the seller’s, restoring the seller’s VA benefits for reuse.

The VA Loan Assumption Process

Assuming a VA loan follows a different process compared to a regular mortgage. Here are the basic steps:

1. Find a home with an assumable VA loan

• Work with a real estate agent to find listings where the seller advertises an assumable VA mortgage.

• Search for key terms like “VA assumable” when looking through home listings online.

2. Review loan terms and home inspection

• Review the loan’s interest rate, balance, monthly payment and other terms.

• Hire an inspector to evaluate the home’s condition.

3. Verify income and credit with lender

• The lender will verify your income, assets, credit history and debts to approve the assumption.

• Each lender has their own exact approval guidelines. VA does not publish standardized requirements.

4. Come to agreement on price and close

• Negotiate a purchase price with the seller. Remember, you’ll need to cash out their home equity.

• Close on the home and loan assumption. The lender will record the transaction and transfer the mortgage to you.

Tips for Finding a VA Loan to Assume

If you want to assume a VA loan, the first step is finding one! Here are some tips:

• Ask real estate agents to keep an eye out for assumable VA loan listings.

• Search for “VA assumption” or similar keywords on real estate sites like Zillow and Realtor.com.

• Look for “assumable mortgage” or “VA loan takeover” on specialized sites like Assumable.org or TakeList.com.

• Check classified ads in local papers. Sellers sometimes advertise assumable loans there.

• Ask lenders if they have clients selling homes with assumable VA loans.

Risks and Drawbacks of VA Assumptions

While assumptions offer key advantages, there are also some potential drawbacks to keep in mind:

For buyers:

• Hard to find – Homes with assumable VA loans can take longer to locate.

• Equity requirement – Buyers usually need to cash out the seller’s home equity at closing, which may require a large down payment.

• Difficulty getting approved – Lenders have strict assumption qualification standards.

For sellers:

• No release of liability – The original borrower remains liable if the assumer defaults on payments.

• Loss of entitlement – Sellers may lose reuse of VA benefits if the buyer is not a veteran.

How Assumable Mortgages Affect VA Entitlement

VA entitlement refers to the amount of VA financing a veteran can utilize. This entitlement gets used up when taking out a VA loan. With an assumption, here is how entitlement works:

• If the assumer is a veteran with available entitlement, they can substitute their entitlement for the seller’s. This restores the seller’s entitlement for future use.

• If the assumer is not a veteran, the seller’s entitlement remains attached to the loan until it’s paid off. The seller loses the ability to reuse those benefits.

• If the civilian assumer later defaults, the seller’s entitlement is permanently lost. They can’t restore and reuse it.

That is why it is usually ideal for a veteran seller to find a veteran buyer to assume their loan. This protects their entitlement for the future.

Release of Liability with a VA Assumption

When a buyer assumes their mortgage, the original borrower is not automatically off the hook. With a VA loan assumption, the seller must request a release of liability from the loan servicer.

This legally releases the seller from financial obligation if the new buyer should miss payments or default. Without a release of liability, the seller could face negative credit impacts and remain on the hook for payments.

Before agreeing to an assumption, the seller should verify the lender will provide a release of liability. This is critical for limiting financial risk down the road.

Pros and Cons of Assuming a VA Mortgage

Below is a full recap of the key pros and cons for buyers and sellers considering a VA loan assumption:

Pros for Buyers

• Lower interest rate
• Lower fees/costs
• Less stringent approval guidelines
• Easier process than new loan

Cons for Buyers

• Hard to find assumable loans
• Large cash outlay to seller
• Still need good credit for approval

Pros for Sellers

• Home more attractive/valuable
• Faster sale process
• Cash-out equity at closing

Cons for Sellers

• Loss of VA entitlement
• Not released from liability
• Little control over buyer

The Bottom Line

Assuming an existing VA loan can offer buyers and sellers significant advantages compared to a conventional purchase mortgage. In a rising rate environment, assumptions are an especially powerful tool.

But VA assumptions also come with risks and limitations to consider. Understanding the full ins and outs of the process is essential before pursuing this route.

For buyers and sellers interested in tapping into the benefits of a VA loan assumption, be sure to consult qualified real estate and lending professionals. They can provide expert guidance tailored to your specific financial situation and goals.