What is a VA assumable loan?
If the original loan was a VA Guaranteed Home Loan that closed after March 1, 1988, it is a VA assumable loan. VA assumable loans allow a homebuyer to take over a homeowner’s mortgage, including the existing loan’s balance, the interest rate, and the monthly mortgage payments, as long as the buyer satisfies the original lender’s borrowing requirements. VA loan assumption is subject to the original lender and VA approval.
Can a non-Veteran assume a VA loan?
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Unlike the VA mortgage loans, which are only available to active or retired Service Members and their families, anyone the lender deems qualified is eligible to take over the loan. This means that even non-veteran homebuyers can assume a VA loan. The lending requirements vary depending on the seller’s financial institution, but borrowers must typically satisfy the following criteria:
- The homebuyers must have a credit score of at least 580.
- Their debt-to-income ratio<6.1.7 debt-to-income ratio calculator> must be 45% or lower.
- Unless the buyers qualify for an exemption, they must pay a VA funding fee equivalent to 0.5% of the existing principal loan balance. In addition, the buyers are also required to pay a processing fee (typically $300 or more) and a credit report fee.
- The buyers must agree to take over the terms of the original loan, including the mortgage lender, mortgage rate, etc.
- Both the buyer and the seller must have a 12-month history of no missed or late payments.
- The person who assumes the loan must occupy the property.
- Those who qualify for the VA funding fee exemption typically belong to one of the following categories:
- Recipients of compensation for an injury resulting from their Military service, or those entitled to such compensation but receiving active-duty or retirement pay instead.
- Those eligible to receive compensation due to a pre-discharge disability examination.
- Purple Heart recipients.
- Surviving Spouse of a Veteran who died in service, went missing in action, was a prisoner of war, or died from a service-related disability.
Although the person assuming the VA loan does not need to be related to the Military, it may be in the sellers’ best interest to choose a qualified Military borrower since they might be eligible to substitute your own VA loan entitlement for the seller’s.
Otherwise, the entitlement utilized to purchase the home remains tied up in the property until the loan is fully repaid, and the sellers may not use their $0 down purchasing power if they decide to buy another property using a VA loan. Besides, the sellers may lose the portion of their entitlement tied in the property entirely if the homebuyers default.
How to assume a VA loan
Although the VA loan assumption process bypasses some of the paperwork related to obtaining a mortgage, it is still a very involved process. Here is how the VA loan assumption process works.
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1
Finding a house for sale with a VA mortgage loan:
Your real estate agent may direct you to a property with sellers who are willing to allow you to assume their VA loan, or you can look for suitable properties on the multiple listing service (MLS). You may also find relevant listings on specialized websites like takelist.com.
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2
The borrower must be eligible for VA loan assumption:
VA loans often have lower requirements for credit score, income, or DTI than other mortgages, but the borrowers must meet these conditions to obtain the original lender and VA’s approval.
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3
The borrower agrees to take over the responsibility of the original loan:
Unlike a traditional mortgage application, the borrower cannot shop around for a mortgage lender and must agree to have the same payments and interest rate as the previous homeowner.
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4
The seller must obtain a release of liability from the lender:
Without this document, the seller will still be held accountable for any late payments made by the new borrower, which could impact their finances and credit score. Before closing on a VA home loan assumption, the home seller should confirm with the lender that a release of liability will be provided when requested since it could be a dealbreaker. The original owner must fill out and submit the VA form 26-6381 to request the release of liability from the VA mortgage.
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5
The buyer must pay the funding fee, closing costs, and down payment (if applicable):
Unless the buyer satisfies the VA funding fee exemptions mentioned above, they will need to pay the equivalent of 0.5% of the existing principal loan balance fee, which goes directly to the VA and helps keep the loan program running for future generations of Military buyers.
In addition, the VA loan assumption includes closing costs such as the credit score processing fee. Finally, depending on the balance of the original loan amount, loan assumption can come with a hefty down payment if the seller holds significant equity in the property and the contract price is higher than the loan balance. The higher the down payment, the lower the funding fee will be.
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6
The buyer exchanges their VA loan entitlement for the seller’s (if applicable):
If the buyer qualifies, they exchange their VA loan entitlement with the original owner so the latter can reuse their VA loan benefits to buy a new home.
Pros and cons
Whether you are the buyer or the seller, a VA loan assumption is not a transaction to take lightly. Although it can be advantageous to both parties, it can also present its challenges. Here are some pros and cons to take into consideration.
Pros
- If the mortgage rates are increasing, assuming a VA loan can give you access to a lower interest rate than you would qualify for otherwise.
- Depending on the loan amount, the buyers may save thousands of dollars in closing costs and other fees required for a new mortgage. Besides, the funding fee for an original VA loan is 2.3% – 3.6% of the total loan, but the buyer only has to pay 0.5% for a VA loan assumption.
- The sellers may regain their full VA loan benefits to buy a new house if the buyers are qualified Military borrowers and substitute their VA entitlement benefits for the sellers’.
Cons
- VA loan assumptions are subject to the approval of the VA and the original lender.
- The buyers may need to pay a sizeable down payment to make up the difference between the home’s purchase price and the loan balance. It can be a significant drawback since original VA loans do not require a down payment.
- A seller may have to forfeit their entitlement if the buyer does not meet Military service requirements.
- If the seller does not obtain a release of liability, the lender will hold the initial borrower responsible for late and missed payments.
- Under VA loan requirements, the property can be a primary residence or a non-primary residence.
