Demystifying the VA Loan Assumption Process in 2023

The ability to assume an existing VA loan and take over the mortgage from the current homeowner is one of the most overlooked benefits of VA loans With mortgage rates on the rise, VA loan assumptions are becoming more appealing as they allow buyers to inherit the low interest rate from the seller’s existing loan

However many buyers have questions about how VA loan assumptions work and what the process entails. In this comprehensive guide we’ll break down everything you need to know about assuming a VA mortgage in 2023.

What is a VA Loan Assumption?

A VA loan assumption allows a buyer to take over the mortgage of the current VA homeowner. Rather than applying for a new loan, the buyer assumes the original loan terms, including the interest rate and remaining loan balance.

The buyer becomes responsible for making the monthly mortgage payments, while the seller is released from liability. VA loans can be assumed by eligible veterans and civilians alike.

Key Benefits of Assuming a VA Loan

There are two major advantages to assuming an existing VA loan versus getting a new mortgage:

Lower Interest Rate

Over 90% of current VA loans have interest rates below 5%, according to data from the Department of Veterans Affairs. With today’s rates above 7% for new loans, assuming a low VA rate can lead to huge savings.

For example, on a $300,000 loan amount, a 3% rate saves you $672 per month compared to a 7% rate. That’s over $8,000 in savings per year that you can use for other financial goals.

Lower Fees

Closing costs and lender fees for a new VA loan can total 2-5% of the total loan amount. VA loan assumptions skip most of these fees altogether.

The buyer only pays a 0.5% VA funding fee, along with minimal title and recording fees. For a $300,000 loan amount, that’s just $1,500 in fees instead of up to $15,000.

VA Loan Assumption Process Step-By-Step

Now let’s walk through the typical VA loan assumption process from start to finish:

1. Find an Assumable VA Loan

The first step is locating a home for sale with an eligible VA loan to assume. VA loans made after March 1988 will state clearly if they are assumable. Work with a real estate agent to find listings that advertise assumable financing.

You can also search major real estate sites for mentions of assumable VA loans. Listings will typically note the interest rate, which is key for judging potential savings.

2. Review Loan Eligibility

Once you find a home you want to assume, review the loan requirements carefully. Most lenders allow assumptions but have their own eligibility standards.

Typical requirements include:

• Minimum credit score (often 620 or 640)
• Debt-to-income ratio below 50%
• Satisfactory credit history
• Sufficient assets and reserves
• Stable employment history

This helps ensure you can afford the monthly payments on the assumed loan.

3. Submit an Assumption Application

After identifying an assumable VA loan on a home you want to buy, submit an assumption application to the mortgage servicer. This involves providing documents that allow the servicer to evaluate your creditworthiness.

Required paperwork usually includes:

• Completed VA assumption application
• Credit report
• Verification of employment
• Recent pay stubs
• Tax returns
• Bank statements

The home seller will also need to agree to the assumption by signing required forms.

4. Property Appraisal

In some cases, the servicer may ask for an appraisal to confirm the home’s current value supports the loan amount being assumed. Fees for the appraisal typically range from $300 to $600.

5. Loan Decision

The servicer will review your application and notify you of the decision within 45 days. The loan is not assumable if the current homeowner is delinquent on payments.

If approved, you’ll receive a formal mortgage commitment letter. If denied, you have 30 days to file an appeal with the VA.

6. Closing Process

Once approved, you can move forward with a streamlined closing process. The small 0.5% VA funding fee and any appraisal or title fees are collected at closing.

You’ll also need to pay off the seller’s home equity. This is often through a second mortgage, seller financing, or cash.

After closing, the home and loan are in your name. You begin making the monthly mortgage payments according to the original VA loan terms.

Tips for a Smooth VA Loan Assumption

Follow these tips to help your VA loan assumption go smoothly:

• Get pre-approved so you know your credit and income qualify
• Work with a realtor familiar with the VA loan assumption process
• Consult multiple lenders to find the best assumption program
• Negotiate the home price to account for taking over the loan
• Understand the risks and costs involved before proceeding

Risks to Consider Before Assuming a VA Loan

While assumptions come with significant benefits, it’s also key to consider a few risks:

• Limited ability to refinance – you inherit the loan as-is
• Difficulty qualifying for a second loan for a new home
• Impacts to seller’s VA entitlement depending on your status
• Potential for higher interest costs over loan term

Consult a loan officer to understand how these risks could impact you based on your personal financial situation and goals.

Who Can Assume a VA Mortgage?

One common question is whether civilians can assume a VA loan, or if it is limited to eligible veterans. The answer is that VA loans are assumable by both veterans and civilians.

However, there are some key considerations for veteran sellers allowing a non-veteran to assume their loan:

• The seller’s VA entitlement remains tied up until the loan is paid off
• They lose that entitlement if the assumer later defaults
• Harder for seller to reuse VA loan benefits for a new home

Because of these risks, some sellers prefer to only allow assumptions to veterans who can substitute their entitlement. But it is ultimately the seller’s choice who to permit to assume their loan.

Finding the Right Lender for Your VA Assumption

As we’ve covered, the lender servicing the existing VA loan will process the assumption and decide whether to approve your application. Each servicer has their own guidelines and processes.

Shop around with a few different lenders to find the VA loan assumption program that best matches your financial profile and homebuying goals. Opt for a lender that offers:

• Low credit score requirements
• Flexible debt-to-income (DTI) limits
• Quick turnaround times
• Strong customer service
• Seamless process from application to closing

This helps set you up for success in assuming the ideal VA loan and home.

Wrap Up

Assuming an existing VA loan can be a smart move when mortgage rates are high or you want to buy a home sooner than saving up for a larger down payment. Just be sure to weigh the pros and cons carefully when deciding if it’s the right move for your situation.

While the process involves some extra steps compared to a normal VA purchase, working with the right real estate agent and lender makes it smooth and straightforward. You’ll be on your way to scoring major monthly savings thanks to the low VA rate from an assumed mortgage.