The VA home loan allows home buying with no down payment or mortgage insurance required. Of course, you’ll need to qualify by being an active duty military member, veteran, or surviving spouse.
But instead of pursuing a new VA loan, what if you want to take over another borrower’s existing VA mortgage or pass on your existing VA loan to someone else? That begs the question: Can VA loans be assumed? For that matter, can anyone assume a VA loan?
Read on to learn more about how to assume a VA loan, who are VA loan assumable candidates, VA loan assumption requirements, and VA assumable loan pros and cons.
Are VA loans assumable?
The good news is that many VA loans are assumable, subject to lender/servicer approval and eligibility requirements.
That means, if allowed by the loan's current servicer, a new borrower can take over an existing VA mortgage loan with the same rate, term, and remaining balance in effect.
VA loan assumption is often pursued when you are trying to buy a home from a seller who already has a VA loan, or in cases of inheritance or property transfer where the home has an existing VA loan attached. However, certain rules apply.
“The U.S. Department of Veterans Affairs backing the loan allows for loan assumption, but the lender of the loan must approve the new borrower first,” says Martin Boonzaayer, CEO of The Trusted Home Buyer. “That means the new borrower has to qualify financially, and the lender has to agree to transfer the loan. As long as those two boxes are checked, assuming a VA loan is totally possible.”
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Who can assume VA loans?
VA loans may be assumable even by civilians who meet lender approval and VA requirements.
“A common scenario is a civilian buyer who assumes a VA loan on a home with a below-market interest rate. That buyer can take over the payments, even though they are not a veteran,” says Mike Bennett, founder and CEO of DealMate Real Estate, LLC.
Another scenario is if a qualified veteran wants to buy the home of another veteran. If approved, the former can assume the current VA loan and, if he uses his own VA benefits to do so, the selling veteran may get his VA loan entitlement restored if the buyer uses their own entitlement and all VA requirements are met.
However, not everyone can assume a VA mortgage. The home buyer has to receive approval and meet the lender’s requirements (more on this next). Also, if restoring the seller’s VA entitlement is required, the buyer must be an eligible veteran, active duty military member, or surviving spouse themselves.
More about entitlement rules
“Keep in mind that when a non-veteran assumes the loan, the seller veteran loses their entitlement until that loan is paid in full. This is important, since the entitlement can potentially reach 100% of the purchase price,” notes attorney David Weisselberger. He adds that good candidates for an assumable VA loan are those who place a high emphasis on maintaining consistent payments.
“An assumable loan is ideal for a buyer who plans to live in the home long-term and desires a payment structure based on a fixed interest rate that is substantially lower than the current market rate,” says Weisselberger.
But if you are a veteran considering listing your home for sale, the logic gets trickier, according to Martin Orefice, CEO of Rent To Own Labs.
“If you are in a situation where you can sell your current home and downsize to an apartment or use the proceeds to purchase a home outright without financing, especially later in life, you won’t give up much by losing your VA loan entitlement,” he says. “However, if you want to get another mortgage loan to purchase another primary residence, you absolutely want to hang on to that entitlement unless you can sell to another qualifying veteran who could use their own entitlement.”
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VA loan assumption requirements
It’s important to understand the rules around VA loans that are assumed. For VA loans originated on or after March 1, 1988, the new borrower must obtain lender approval and meet the lender’s credit and income standards. Also, the loan has to be current at the time of assumption.
“That means the loan servicer will need to review the home buyer like a new borrower, then issue a written approval and an assumption agreement,” says Bennett.
To assume an existing VA loan, the new borrower will need to:
– Prove they’re financially stable by passing income verification and credit checks, as is true with a regular mortgage loan.
– Provide necessary documents to the lender, including photo identification, pay stubs, W-2s, tax returns, and bank statements.
– Typically have a credit score of at least 620 and a debt-to-income ratio of 41% or less. These rules vary by lender since the VA doesn't set rules itself.
– Pay a one-time VA funding fee of 0.5% of the loan balance (unless they’re exempt), due within 15 days of the assumption.
– Bring cash to closing to make up the difference between what the home is worth and what is still owed on the seller’s loan.
If there’s a gap between the home’s price and the VA loan balance, the buyer and seller can opt to work out a special deal. For example, the seller might provide a second loan for the difference or contribute some cash to help cover it. However, any secondary financing will need the consent of the loan servicer and should be disclosed in the assumption package.
VA assumable loan pros and cons
There are benefits and drawbacks to assuming a VA loan. Here’s a breakdown of the pluses and minuses.
VA assumable loan pros
Among the advantages of assuming a VA loan, you may:
– Pay less interest. The existing VA loan may offer a lower interest rate than current market rates offered by other lenders. A lower rate can equate to thousands of dollars saved over the life of the loan.
– Enjoy a shorter term. You will be taking over the loan at the same point the seller has paid into it. For example, if the seller originally took out a 30-year VA loan that is 10 years into the term, you will only have 20 years left on your loan schedule.
– Pay lower closing costs. While you will still have to pay a 0.5% funding fee on the remaining loan balance unless you are exempt, you won’t be on the hook for a new full VA loan origination fee. However, other closing expenses still apply, including costs for loan processing, escrow, title, and recording.
– Possibly close more quickly. Each loan is different, but it can often take between 30 and 60 days to close on a VA assumption loan, versus 30 to 75 days for other types of loans. “Buyers can often avoid the usual obstacles associated with loan origination and benefit from a more straightforward underwriting procedure that prioritizes qualification over complete loan restructuring, often with no new appraisal required,” says Dennis Shirshikov, a professor of economics and finance at City University of New York/Queens College.
VA assumable loan cons
Then again, there are risks and downsides associated with VA loan assumption, such as:
– You may need to pay a large amount of cash to cover the difference between the property’s value and the remaining VA loan balance. “Even if you bridge that gap with a seller carry-back second loan or a negotiated price or credit, it requires loan servicer consent and clear documentation,” cautions Shirshikov.
– If the selling veteran’s entitlement is not released, they face additional challenges that could restrict their future ability to borrow from the VA. “If a non-veteran assumes the loan, the seller’s VA entitlement stays tied up until the loan is repaid,” adds Shirshikov.
– The lender has to manually approve the assumption, which can add extra time to the process.
– Although you are allowed to refinance the VA loan, non-veterans aren’t allowed to choose a VA Interest Rate Reduction Refinance Loan (IRRRL/VA streamline refinance) or VA cash-out refinance loan; instead, you’ll be limited to refinancing into a conventional mortgage, FHA, or other loan types.
– You may not qualify if you don’t meet credit score, DTI, income, and employment requirements.
How to find assumable VA loans
Locating an assumable VA loan may not be easy. But you can ask your real estate agent to find these opportunities for you, which may involve conducting a keyword search across the MLS for “assumable,” “VA assumable,” or “loan assumption.”
“Online real estate listings sometimes highlight assumable mortgages in the description, as well. Purpose-built marketplaces and investor platforms can help, too,” suggests Bennett.
Homes located near military bases often have VA mortgages, “so asking listing agents directly can help uncover opportunities that aren’t advertised,” Boonzaayer recommends.
How to assume a VA loan
Here are the typical steps involved with assuming a VA loan:
– Confirm that the seller’s existing loan is VA and assumable and current on payments.
– Request the key loan terms in writing from the loan servicer or seller, including rate, remaining balance, principal and interest, escrow, and remaining term. “This allows you to compare against a new loan and decide if a VA loan assumption is worth pursuing,” says Bennett.
– Have the home professionally inspected (optional).
– Make an offer on the property and go under contract. “Be sure the contract includes an assumption approval contingency, a particular deadline, and a requirement for a formal release of liability for the seller and – where applicable – substitution or restoration of VA entitlement,” Bennett advises.
– Apply for loan assumption approval from the existing lender, and await an underwriting decision.
– If approved, sign assumption paperwork and pay the 0.5% VA funding fee.
– Close on the assumption loan. Bring the necessary funds to closing, including the gap between the home’s value and the remaining loan balance, if applicable.
Important considerations
Before committing to a VA loan assumption, it’s crucial to carefully consider different factors. You want to verify that the loan is assumable and current, of course. Additionally, it’s important to check whether VA entitlement will be restored or remain tied to the loan. And you should crunch the numbers. Determine your monthly payments, remaining term, and escrow amounts to ensure that the loan works for your budget and life goals.
Also, ensure you are properly protected. “Include in your contract an assumption approval contingency, a clause requiring the servicer’s written approval before releasing earnest money, a right to cancel if the servicer denies any planned second lien, and a requirement that the closing includes the release of liability and entitlement documentation,” Bennett recommends.
When is a VA loan assumption a good fit?
Assumption often makes the most sense when interest rates are higher than the rate on a current VA assumable loan and the buyer has cash on hand to cover the equity gap.
“Borrowers who want to reduce their long-term borrowing costs, have good credit, and a consistent income are all good candidates,” Shirshikov continues. “Buyers who appreciate fixed payments and a lower closing cost structure will also find it appealing.”
So long as you can qualify under the loan servicer’s requirements, cover or creatively bridge the equity gap, and count on holding the loan long enough to exceed the breakeven point on the cost involved, VA loan assumption can be worth it.
“Veterans and military members who can substitute entitlement are especially strong fits for sellers who want their benefit restored, and civilian buyers can still be a great match when everyone documents the release of liability and uses clear escrow safeguards,” Bennett points out.
Assuming a VA loan could create unique benefits for buyers who understand the process
Whether you want to capitalize on lower interest rates and closing costs, a shorter loan term, or other benefits, an assumable VA loan can make a lot of sense. Just be sure to carefully check that the VA loan is assumable, you qualify as a new borrower, and you understand the impact on VA entitlement.
“If you come across a VA loan with a great low rate, don’t hesitate – these opportunities go fast,” says Boonzaayer. “The right guidance and due diligence can make a VA assumption incredibly powerful, both for saving money and building long-term financial stability.”
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