Assuming a VA home loan can be an excellent way for buyers to purchase a home with little money down in today’s rising interest rate environment. VA loans have historically offered some of the lowest interest rates in the market. This makes them prime candidates for assumptions, allowing buyers to take over the seller’s low rate.
In this comprehensive guide, we’ll cover everything you need to know about VA loan assumptions. Here’s what we’ll tackle
- What is a VA loan assumption?
- How VA loan assumptions work
- Requirements and eligibility for assumptions
- The pros and cons of assuming a VA loan
- How to find assumable VA loans
- The VA loan assumption process step-by-step
- FAQs about VA loan assumptions
Let’s get started!
What is a VA Loan Assumption?
A VA loan assumption allows a buyer to take over the mortgage of a current VA homeowner, The buyer “assumes” both the home and the remaining VA loan balance from the seller
Specifically, assumption refers to two key transactions:
-
Transfer of Ownership: The home’s title transfers from the seller to the buyer.
-
Release of Liability: The seller is released from financial liability on the mortgage. The buyer becomes responsible for making the monthly payments.
In most cases, the assumer makes a lump sum cash payment to the seller at closing. This pays off the seller’s remaining equity in the home.
The key benefit of an assumption is taking over the VA loan’s low interest rate. Rates on a 30-year fixed VA mortgage currently average around 7%. Many existing VA loans have rates below 5%.
Lower rates make monthly payments more affordable. Assumptions provide a pathway to homeownership, especially when today’s rates price some buyers out.
How Do VA Loan Assumptions Work?
Assuming a mortgage instead of getting a new loan saves buyers time and money. But how does the process actually work?
Here are the key steps in a VA loan assumption:
1. Find a Home with an Assumable Loan
The first step is finding a home listing with an existing VA mortgage you can assume. Veterans United can help match you with assumable VA loans in your area.
2. Make an Offer Contingent on Assumption
Your purchase offer can be contingent on successfully assuming the current VA mortgage. This helps limit risk before you agree to buy.
3. Provide Financial Documents to the Lender
Next, you’ll provide documents so the lender can evaluate your credit, income, and overall eligibility to assume the loan.
4. Get VA Approval for the Assumption
The lender then submits your package to the VA for approval of the assumption. Turnaround time is usually within 10 business days.
5. Close on the Home and Loan Assumption
Once approved, you’ll close on the home purchase and loan assumption. You make any required down payment and take over the monthly mortgage payments.
While the VA guides the assumption process, the lender holding the mortgage sets more specific eligibility standards. Approved VA lenders like Veterans United handle the entire assumption process start to finish.
VA Loan Assumption Requirements and Eligibility
The VA’s assumption requirements focus on ensuring you can afford the monthly payments. Lenders look at factors like your income, credit score, and overall qualifications.
Here are some key VA guidelines on assuming a loan:
-
Credit Score: Most lenders require a minimum 620 credit score. Some may approve scores as low as 580 with strong compensating factors.
-
Debt-to-Income Ratio: Your total monthly debt payments, including the assumed mortgage, usually can’t exceed 41% of gross monthly income.
-
Loan Status: The loan must be current. Loans in default are not eligible for assumptions.
-
Occupancy: Unless exempt, you must use the home as your primary residence.
-
Funding Fee: All assumers pay a 0.5% funding fee, unless exempt. This funds the VA home loan program.
Specific requirements depend partly on whether the lender has “automatic authority” to approve assumptions. Either way, the VA ultimately signs off on each deal.
Veterans United’s experienced loan officers can talk through assumptions eligibility and requirements. We’ll help assess if an assumption makes sense for your situation.
The Pros and Cons of VA Loan Assumptions
Assuming a VA loan offers big benefits but also comes with some tradeoffs to consider. Let’s look at the key pros and cons.
Pros of Assumptions
Low Interest Rates
The #1 benefit is getting a lower rate than you could get on a new VA purchase loan. Monthly savings add up over the life of the loan.
Lower Fees
Assumptions come with lower upfront fees compared to a VA purchase mortgage. You avoid the lender and broker fees that come with a new home loan.
No Down Payment Required
No down payment is required in most cases. However, you likely need cash to pay off the seller’s equity.
Easier Qualifying Standards
Assumptions come with slightly easier credit and underwriting standards compared to a new VA loan.
Cons of Assumptions
Homeowner Equity
You must have the cash to pay off the seller’s equity in the home. This is often the biggest hurdle.
Limited Home Selection
Your home search gets narrowed down to listings with assumable loans. New construction and many resales won’t qualify.
Loan Approval Not Guaranteed
While standards are easier, loan approval is never 100% guaranteed upfront. Income and credit still matter.
Risks for VA Sellers
If the assumer defaults, it can impact the VA seller’s ability to reuse their VA loan entitlement.
As with any major financial move, be sure to think through the pros and cons before pursuing a VA loan assumption. The upfront home equity requirement is often the biggest consideration.
How to Find VA Loans Available for Assumption
If you’ve decided to consider buying a home through a VA loan assumption, the next step is finding available properties. Here are some tips for locating VA assumable loans:
-
Check real estate listings: Many listings advertise if the property has an assumable VA or FHA loan. This is a big selling point today.
-
Contact lenders: Local lenders can check their portfolio for eligible assumable VA loans they hold.
-
Work with a real estate agent: Experienced agents often know which listings may have assumable mortgages. Or they can find out for you.
-
Look for “for sale by owner”: Sellers listing FSBO are more likely to offer creative options like assumptions.
-
Search for recently built homes: VA loans issued in the past 2-3 years often have very low interest rates ideal for assumptions.
Cast a wide net when searching. Partnering with an experienced real estate agent and mortgage lender maximizes your chances of finding an assumable VA loan that suits your needs.
Step-by-Step VA Loan Assumption Process
If you’ve found an ideal home with an assumable VA loan, what next? Here is a step-by-step walkthrough of the assumption process:
Step 1: Make an Offer Contingent on Assumption
Submit a purchase offer contingent on successfully assuming the mortgage. This gives you an out if issues arise.
Step 2: Provide Documents for VA Assumption Approval
You’ll provide financial documents and VA will review your eligibility to assume the loan.
Step 3: Get Appraisal to Determine Property Value
An appraisal establishes the home’s current market value. This ensures you aren’t overpaying.
Step 4: Receive Approval from VA on Assumption
The VA will issue final approval on assuming the existing home loan. This is typically within 10 business days.
Step 5: Close on the Property and Loan Assumption
At closing, you take ownership and become liable for the mortgage. Make any required down payment to the seller.
Step 6: Start Making the Monthly Mortgage Payments
You’ll begin making the existing loan’s monthly principal and interest payments. Congrats, you’re officially a homeowner!
Lean on your lender and real estate agent throughout the process. Veterans United will handle all the mortgage legwork for you – from pre-approval to closing.
Frequently Asked Questions About VA Loan Assumptions
Let’s wrap up by answering some common questions about VA loan assumptions:
Are VA loans assumable?
Yes, VA loans can be assumed by creditworthy buyers. Assumptions are a benefit unique to VA and FHA loans.
Can a non-Veteran assume a VA loan?
Yes, VA loans can be assumed by Veterans and civilians alike. But it comes with risks to the seller’s VA entitlement.
Do I need a down payment to assume a VA loan?
Usually not. But you must have funds to pay the seller’s home equity at closing.
**How can I