VA loans have a unique benefit that sets them apart from conventional mortgages – they are assumable This allows a new buyer to take over the loan from the existing homeowner and inherit the terms and conditions, including the interest rate and monthly payments But what exactly does it mean when a VA loan is assumable, and how does the process work? This comprehensive guide will explain everything you need to know.
What is a VA Assumable Loan?
An assumable VA loan allows a new homebuyer to assume the mortgage of the current homeowner. Instead of applying for a new loan the buyer takes over the payments and terms of the seller’s existing VA loan.
Some key things to know:
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The buyer takes over the remaining balance, interest rate, and term of the loan from the seller. This allows them to assume low interest rates that are no longer available.
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The loan is transferred directly – there is no refinancing or origination of a new mortgage.
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Assumable loans bypass many of the fees and closing costs of a new purchase loan.
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The buyer must be approved by the lender and qualify based on income, credit and ability to repay the loan.
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VA loans can be assumed an unlimited number of times. Both veterans and civilians can assume them.
Assumable loans provide a shortcut to homeownership by allowing buyers to take advantage of low rates and avoid hefty fees. This makes purchasing more affordable.
How Do VA Loan Assumptions Work?
Here is an overview of the VA loan assumption process:
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Find a Home with an Assumable Loan: The buyer can work with a real estate agent to identify homes with assumable VA loans, or search property listings themselves.
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Get Pre-approved: The buyer will need a pre-approval letter from a lender showing they qualify for the loan amount.
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Make an Offer: If the seller accepts the offer, the buyer will move forward with the assumption process.
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Provide Documents to Lender: The lender will verify income, assets, credit and eligibility to assume the loan. Veterans need a Certificate of Eligibility.
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Lender Approval: After review, the lender will approve or deny the assumption application. If approved, closing paperwork is prepared.
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Closing: The buyer and seller sign final loan assumption paperwork and the home sale is complete.
It’s important to note that the buyer pays closing costs, which may includeorigination fees, application fees, credit check fees and more. Veterans are also charged a 0.5% funding fee.
Top 5 Benefits of Assumable VA Loans
There are many advantages to assuming a VA loan rather than taking out a new mortgage. Here are some of the top benefits:
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Lower Interest Rates: Assuming a loan allows buyers to secure lower rates no longer available to new borrowers. This results in significant savings.
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Lower Fees: Much of the closing costs and fees associated with a new VA loan are avoided with an assumption.
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Faster Process: Assumptions don’t require lengthy underwriting and approvals, allowing buyers to close quicker.
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Loan Terms: Longer loan terms or fixed rates can be inherited, giving buyers stability.
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Buying Power: Assumable loans increase affordability and allow buyers to purchase more expensive properties.
In today’s rising rate environment, assumptions allow buyers to secure rates 3-4% lower than current offerings. This translates into hundreds of dollars in monthly savings.
Who is Eligible to Assume a VA Loan?
The VA allows a wide range of buyers to assume existing loans, including:
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Veterans: Must have enough entitlement to substitute for the seller’s entitlement.
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Active Military: Like veterans, they can use their home loan benefit entitlement.
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Surviving Spouses: Spouses of deceased veterans qualify with documentation.
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Non-Veterans: Credit, income and eligibility must be verified by lender. No entitlement needed.
Veterans need a Certificate of Eligibility to prove their eligibility. Others will need to provide financial details for the lender’s approval process.
Disadvantages of VA Loan Assumptions
There are also some potential drawbacks of assumptions to be aware of:
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Limited inventory: Available homes with assumable loans can be difficult to find.
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Cash needed: Buyers usually need cash to pay off the seller’s equity.
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Credit checks: Assumptions may require hard credit pulls that temporarily lower scores.
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Loan approval: Approval is not guaranteed. Buyers must still prove they can repay.
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Entitlement: If entitlement is not substituted, the seller’s entitlement remains tied up.
While not common, assumptions do come with risks like any real estate transaction. Doing thorough research is key.
Locating Homes with Assumable Loans
Buyers will need to actively search for available homes with assumable VA loans. Here are some tips:
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Contact real estate agents and request help finding listings with assumptions.
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Search websites like Zillow, Trulia, Realtor.com for “assumable mortgage” listings.
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Look for VA/FHA loans in listings, then call the agent to ask about assumptions.
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Check specialty military real estate sites with assumption services.
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Talk to lenders about available VA inventory with assumptions.
Casting a wide net by utilizing multiple online and offline resources is the best way to locate assumable VA loan opportunities.
The Assumption Process for Non-Veterans
Civilians assuming a VA loan follow a slightly different process:
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They cannot obtain a Certificate of Eligibility from the VA.
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Income, assets, credit and eligibility are more closely verified.
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Down payment funds must be documented if needed for equity.
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Qualifying ratios tend to be more stringent for non-veterans.
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Processing fees may be higher, as civilians cannot substitute entitlement.
While civilians don’t enjoy the full benefits of entitlement, they can still assume a VA loan with proper documentation and lender approval.
FAQs about Assumable VA Loans
Can any VA loan be assumed?
Yes, VA loans can be assumed regardless of type. This includes Purchase, Cash-Out Refinance, Streamline, Renovation loans, etc.
Can the new buyer change the loan terms?
No, the new buyer inherits the exact loan details including rate, term, payment, etc. Renegotiation is not possible.
How often can a VA loan be assumed?
There is no limit on how many times a VA loan can be assumed over its life. Only one assumption is permitted per sale.
Can a VA loan be assumed by anyone?
No, the buyer must be approved by the lender based on credit, income, assets and ability to repay the loan. There is no automatic approval.
Can the seller make money on the assumption?
Yes, the buyer must pay off the seller’s equity. This is often done by a cash payment at closing.
The Bottom Line
Assuming a VA loan can be a huge benefit by providing access to lower rates and avoiding expensive closing costs. Both veterans and civilians have the opportunity to obtain significant savings if the loan assumption process is followed carefully.
While not without risks, assumptions give homebuyers expanded purchasing power and flexibility. In today’s housing market facing rising rates and costs, it’s easy to see why assumable VA loans are surging in popularity. They provide a unique opportunity to secure favorable financing terms amidst an ever-changing mortgage landscape.