How to Assume a VA Loan: A Complete Guide

Assuming a VA mortgage can be an excellent way for homebuyers to purchase a home with a low interest rate. With mortgage rates on the rise, assuming an existing VA loan with a lower rate can lead to significant savings.

In this complete guide, we’ll break down exactly how VA loan assumptions work who is eligible, the pros and cons and step-by-step instructions for assuming a VA mortgage.

What is a VA Loan Assumption?

A VA loan assumption allows a homebuyer to take over the mortgage of the current homeowner Instead of applying for a new loan, the buyer assumes the seller’s existing VA mortgage and takes over the remaining loan balance

The buyer becomes responsible for making the monthly payments, while the seller is released from the loan obligation. The loan terms, including the interest rate and remaining loan term, stay the same.

Who is Eligible to Assume a VA Loan?

VA loans can be assumed by both veterans and civilians. The lender will evaluate the creditworthiness of the potential buyer to determine if they qualify. Here are the basic VA loan assumption eligibility requirements:

• Good credit (620+ FICO score)
• Acceptable debt-to-income ratio (below 41%)
• Sufficient income to afford mortgage payments
• Satisfactory credit history and employment history

Veterans with full VA loan entitlement are preferred, as they can substitute their entitlement for the seller’s. This releases the seller’s entitlement back to them to reuse in the future.

The Pros and Cons of Assuming a VA Mortgage

There are several advantages that make assuming a VA loan attractive to some homebuyers:

Pros

• Lower interest rate than current rates, leading to savings
• Minimal fees and closing costs compared to a purchase loan
• Fast process with less paperwork than a regular mortgage
• No appraisal required

However, there are also some potential downsides to be aware of:

Cons

• Limited availability – have to find a homeowner willing to allow assumption
• Large cash outlay may be needed to buy out homeowner’s equity
• Risks for seller’s VA entitlement if assumed by civilian

As you can see, assumptions involve a unique set of trade-offs. Make sure to think through the pros and cons to decide if it’s the right move for your situation.

How to Find a Home with an Assumable VA Loan

The first step is identifying available homes that have an assumable VA mortgage Here are some tips for finding assumption opportunities

• Work with a real estate agent to search for listings in the MLS with assumable financing.
• Look for “assumable loan” or “lower rate assumption” mentioned in the property description.
• Search for VA/FHA loans originated more than 5+ years ago, before rates increased.
• Consider reaching out to homeowners with existing VA loans to see if they will allow an assumption.

Cast a wide net in your search, as assumable VA loans are not extremely common in today’s market. But be persistent and creative, and you may be able to find one that suits your homebuying needs.

How Does the VA Loan Assumption Process Work?

Once you’ve identified a home to assume, you’ll need to complete the required paperwork and get approval from the lender. Here is an overview of the basic VA assumption process:

1. Review the loan terms and home price

Make sure you understand the loan details, home value, and required down payment. Get prequalified to confirm you can afford the monthly payments.

2. Submit your assumption application and documents

You’ll need to provide financial details and authorization for the lender to pull your credit report. This helps them evaluate your qualifications.

3. Get appraisal (optional) and home inspection

These are not required, but highly recommended to understand the property condition and confirm the home value.

4. Reach agreement with seller on down payment amount

Negotiate with the seller on how much you’ll pay at closing for their equity.

5. Close on the home and make the down payment

At closing, you’ll pay the down payment, assumption fee, and other closing costs. Ownership is transferred to you.

6. Make the VA mortgage payments

You are now responsible for making the monthly payments on the loan going forward.

Be sure to communicate closely with the lender throughout the assumption process. Their specific requirements may vary.

Down Payment Needed for a VA Assumption

One key point to understand is the down payment needed for a VA assumption. Since the seller has built up equity in the home, they will want compensation from the buyer taking over their loan.

The down payment required is based on the difference between the current home value and loan balance:

Home Value: $300,000

Loan Balance: $250,000

Seller’s Equity: $50,000

In this example, the buyer would need to bring $50,000 to closing to pay the seller for their equity and make the deal worthwhile.

Work closely with the lender and seller to agree on the down payment amount for a smooth closing. The buyer may need to explore secondary financing options if they don’t have sufficient cash on hand.

VA Loan Assumption vs. Traditional Mortgage

How does assuming a mortgage compare to getting a new VA or conventional loan? Here are some key differences:

• Interest rate – Assumed loans likely have lower rates
• Fees/costs – Much lower for assumptions
• Credit qualifications – Typically easier to qualify to assume
• Paperwork – Streamlined process for assumptions
• Seller’s equity – Must compensate seller when assuming

Assuming an existing VA loan can make the homebuying process simpler, less expensive, and lead to savings over the long run. But also consider current mortgage rates and shop around to make sure an assumption is your best option.

Is Assuming a VA Loan Right for You?

Assuming a VA mortgage can be a smart move, but it’s not right for everyone. Consider your specific situation to decide if this route is best.

Key questions to ask yourself:

• Can you qualify for a VA assumption based on your credit/income?
• How much savings from a lower rate would you realize?
• Can you afford the required down payment to the seller?
• Are you comfortable with the risks and limitations?

Carefully weigh the pros and cons. An assumption might be a great fit or it may be better to get a new mortgage. Evaluate both approaches to make the most informed decision.

The Bottom Line

Assuming an existing VA home loan can allow buyers to obtain a lower rate and potentially significant savings. While not very common in today’s market, assumptions remain a possibility for savvy homebuyers.

Focus on finding available homes with assumable loans and be prepared to compensate the seller for their equity. Work closely with your lender and real estate agent to execute a smooth assumption process.

While assuming a VA loan has risks and limitations, it can be the right move in certain situations. Carefully consider your options to make the best home financing decision for your needs.