VA loan is a flexible, no down payment required mortgage option that is offered to veterans, active service members, and surviving spouses who wish to buy a house as their primary residence or refinance an existing loan. It's issued by private lending companies and backed by the US Department of Veterans Affairs (VA). Since its creation in 1944, more than 24 million eligible applicants have become homeowners.
Are VA Loans Assumable?
VA loan is an assumable mortgage, which is one of its many benefits. Mortgage assumption is the process of having another person take over the mortgage and interest in the property instead of selling it on the real estate market. But just like any other loan, it comes with pros and cons.
How to assume a mortgage? The person who assumes the loan takes over the loan balance, interest rate, as well as monthly mortgage payment. VA loans that were closed after March 1, 1988, must be approved by the current lending company for the assumption. Only select VA lenders allow mortgage assumptions, so be sure to check with the lending company first.
Assuming VA loans is an attractive option for real estate buyers for many reasons. With the VA home loan assumption, you don’t need to be an active service member, military veteran, or surviving spouse to be eligible. Not only that, you’re getting the mortgage’s existing interest rate. It's a straightforward benefit if the mortgage for assumption has a lower rate than new loans. You will also pay a lower VA funding fee and closing costs.
What's the Process of a VA Loan Assumption?
The process of assuming a loan varies among lenders. But, here are the common steps involved:
- Find Out If The VA Loan Is Assumable – Talk to the lender of the current mortgage holder and ask if the VA loan can be assumed.
- Prepare For The Cost Associated With The Loan Assumption – These include the down payment, closing costs, and processing fees.
- Submit An Application – The application process may vary from one lender to another. But generally speaking, you will be required to fill out an application form.
- Submit Required Documents – You will be asked to submit personal financial documents so the lender can check your creditworthiness and if you can afford to assume the loan. These may include bank statements and pay stubs.
- Close and Sign Liability Release – If your VA loan assumption is approved, you need to sign the final documents including the deed of trust and liability release.
Can Non-Veterans Assume a VA Home Loan?
Can a civilian assume a VA mortgage? Yes. VA loan assumption is open not only to military veterans, active-duty members, and military families but for non-military veterans, too. Applicants just need to meet the VA income and credit requirements to assume VA home loans.
Why do this at all?
For sellers with changing needs, new life goals, or plans, having their VA loans assumed is a faster and less stressful way of getting out of mortgages than selling it on the market.
For buyers, there’s no need to go through the hassle of applying for a new loan. Assuming a VA loan also costs less than getting a new mortgage in terms of the closing costs, appraisal fee, funding fee, and more. Furthermore, you can get a better interest rate if the VA home loan you’re planning to assume has a lower rate than that of a new home loan, which usually comes with a higher interest rate.
What are the Requirements to Assume a VA Loan?
- The buyer must meet the minimum credit score requirement set by the lender, which usually ranges between 580 and 660.
- The buyer must have a debt-to-income ratio of less than 41%.
- The buyer must have a steady source of income (may be asked to present pay stubs, bank statements, etc.)
- The buyer must agree to take over the payment obligations for the mortgage to be assumed.
- The existing mortgage must be current. All past dues must be paid on or before closing.
- Pay a funding fee and processing fee.
What are the Benefits of Assuming a VA Loan?
- You don’t need to be a veteran, active service member, or military family to assume a loan.
- The costs associated with VA loan assumptions are less than the amount you need to pay when you get a new loan (e.g., closing costs, appraisal fees).
- You can enjoy better terms, especially when the assumable mortgage was closed with a lower interest rate than the rate that a new loan will have today.
What are the Cons of Assuming a VA Loan?
- Not all VA lenders allow the assumption of a VA loan. If you’re a buyer, you’ll have to find a lender that allows borrowers to assume a VA loan. Lending companies that are not authorized to assume a loan must forward all requests to its local veterans' affairs office for review and approval, which means the process of assuming the VA mortgage could take longer.
- If it involves swapping VA housing entitlements, the buyer who assumes the loan must only use the property as their primary residence.
- If a non-veteran assumes the VA loan, the seller’s remaining portion of the VA loan entitlement will stay with the original loan until the VA mortgage is paid in full.
- Buyers may need to pay a hefty down payment if the VA loan owner decides to sell their property for more than the actual amount they owe on the loan.
How Does An Assumable Mortgage Work?
An assumable mortgage involves transferring a loan from one person to another with the original terms remaining in place. The buyers of the VA loan take over the remaining balance on a mortgage while keeping the original terms including the interest rate, repayment period, principal loan balance, etc.
The rights and the responsibilities of the original borrower are transferred to the person who assumes the loan. They will also be responsible for making future mortgage payments once the assumption has been finalized.
Since the assumable mortgage is only applicable to the remaining mortgage balance of the loan and does not include the home’s current value, the buyer will have to make up for the difference by paying the difference upfront or by taking out a second loan.
For example, if the sellers have a remaining balance of $300,000 and the value of the property is $450,000, the buyer has to cover $150,000 to compensate for the seller’s equity. The excess amount you need to cover will depend on the seller’s asking price for the loan and property to assume.
What are the Benefits of Mortgage Assumption for a Homebuyer and Home Seller?
- You don’t need to go through the hassle of applying for a new loan.
- You may get lower interest rates.
- You may pay fewer fees such as closing costs.
- You may not need to order an appraisal.
- You don’t need to be a military veteran, active duty member, or surviving spouse to be eligible for a VA loan assumption.
- You can get rid of your loan quickly.
- You can easily sell the house especially if the mortgage tied to it comes with low-interest rates.
- You will be reimbursed for the equity that you have built up in your home.
Is Another VA Loan Possible if You have had a VA Loan Assumed from You?
Yes, you can, under certain conditions. You may be eligible to apply for VA loans even if you have had a VA loan assumed from you if you managed to obtain a Substitution of Entitlement (SOE) from the buyer. Also called a Statement of Veteran Assuming GI Loan, the SOE is a form (VA Form 26-8106) that says the VA loan assumer allows the substitution of their entitlement for that of the VA loan seller.
As a seller, failing to get this certification means your entitlement will remain tied up until the assumer fully repays the original VA loan. Until then, you won’t be eligible for another VA loan. Remember that this only applies if the person who will assume your VA mortgage is a qualified military veteran or service member. If the person who assumes the mortgage is a civilian, your VA loan entitlement will remain tied to the original loan until it’s paid off. A release of liability must also be obtained once the assumption is approved so that the seller will no longer be responsible for the VA loan and will have no liability over related losses.
Can You Transfer a VA Loan to Another Person?
Are VA loans transferable? Yes, a VA home loan can be transferred to a veteran or non-veteran individual who wants to purchase a house through a process called VA loan assumption as long as the person assuming the loan meets the income and credit eligibility requirements set by the lending institution.
How Much Does a VA Loan Assumption Cost?
According to the VA Lender’s Handbook, lenders may charge a fee for VA loan assumptions. Other fees also apply including processing fees and the cost of credit reports.
For lenders that are allowed to approve VA loan assumptions, they may charge a processing fee of “$300 plus the actual cost of a credit report.” Meanwhile, lending institutions that need to forward VA loan transactions to a local VA office for manual approval, may charge “$250 + the cost of a credit report.
Those who assume VA loans must pay a funding fee, which is equivalent to 0.5% of the VA loan to their local veterans' affairs office 15 days after the VA loan assumption.
Some people who are assuming the VA home loan are exempted from paying the funding fee. These include:
- Veterans who are receiving or entitled to receive compensation from the VA for disability sustained while in service.
- Veterans who are deemed qualified to be compensated after a pre-discharge disability rating or exam.
- Surviving spouses of veterans who died from a service-related disability or while in service.
If you want to get an estimate of the monthly payments on a VA home loan, you can use a VA loan assumption calculator online.
How Long Does it Take to Assume a VA Loan?
The process to assume a VA loan may take about 45-90 days. It depends on the lender, the underwriting process, and your unique circumstances. The loan assumption may take longer if there are more problems during the underwriting process or if you’re asked to provide more documentation.
Who is Liable After a VA Loan is Assumed?
If a veteran home buyer wants to purchase your house and assume a VA loan, it is possible to “swap” your entitlements. Basically, the veteran homebuyer will use their VA entitlement and in so doing, your VA entitlement will be restored. When this happens, the VA who will assume your mortgage will be liable in the event of a default.
On the other hand, if a civilian wants to purchase your home and assume a VA loan, they don’t have a VA entitlement to substitute for yours. This means, your entitlement will remain tied up to the original mortgage. If the non-veteran home buyer who assumed the VA loan defaults on the loan, you can still be held liable. Aside from that, the civilian who assumed your house and mortgage may sell the property to someone else, and you will still be held liable for any losses related to the mortgage.
The buyer must sign a release of liability so the seller will no longer responsible for the mortgage once it’s been assumed.
What Happens When Someone Dies with a VA Loan?
What happens to the VA loan if the borrower dies before paying off the debt in full? Assuming a VA loan after death means the surviving spouse will be responsible for the debt. If the borrower is single but has a co-borrower, then they will take over the debt. If the deceased borrower has neither, the borrower’s estate will handle the debt. The VA loan could also be assumed by an eligible buyer who could be a veteran, non-veteran, or even the children of the deceased owner of the original loan.
Does Assuming a Mortgage Hurt Your Credit?
Assuming a mortgage won’t hurt your credit any more than when you apply for a new home loan. The lender may check your credit history to determine your creditworthiness and this may knock off a few points from your score. But with regular and timely payments and other good borrowing habits, you can easily improve your credit standing.
Should You Consult a Specialist?
As a buyer, it is best to consult a specialist first to make sure that a VA loan assumption is the best option for you. You can also talk to a VA-approved lender such as the USAA Bank or the Veterans United Home Loans for more details about VA loans and assuming a mortgage.
VA loan assumption is a good option if you’re a seller who’s looking to get out of your VA loan quickly. It’s also worth considering if you want to purchase a new house without the hassle of applying for new loans or if you’re looking for home loans with cheaper costs and lower interest rates.
Whether you’re a veteran, active service member, surviving spouse, or a civilian, you may be eligible to assume VA home loans. You just need to meet the credit and income eligibility requirements to prove your creditworthiness. Just be sure to understand the pros and cons before making a decision.