Yes, a VA home loan can be transferred to another borrower, regardless if he’s a veteran or not. This process is referred to as VA loan assumption. However, the assuming borrower must meet certain requirements and must be financially eligible to take over the VA home loan.
Loans that were closed before March 1988 can be transferred without the lender’s approval. Unfortunately, you’ll only find a few of such loans given that they’re almost 30 years old now. Meanwhile, loans that were closed after that date that need to be transferred must secure the lender’s approval. Therefore, the person who will assume the VA loan must pass the requirements, including the credit score and income, set by the creditor to determine their creditworthiness.
How Does VA Loan Assumption Work?
As mentioned earlier, VA home loans can be transferred to a new lender-approved borrower.
As per the requirement listed in VA Pamphlet 26-7, section 5-23, the VA home loan must be current or brought to current before the lender can permit the VA loan assumption. So, if you’re planning to have your VA loan assumed, you need to make sure that the mortgage payments are current.
Why Would You Want to Assume a VA Home Loan?
- If you’re looking for a lower interest rate. If the house was originally closed with a lower interest rate, you can take advantage of that lower locked-in interest rate.
- If you’re looking to pay for fewer closing costs.
- If you’re looking to save on the VA funding fee (only 0.5% for VA loan assumption).
Why Do You Want to Have Your VA Loan Assumed?
You can find a buyer who is willing to assume your VA loan if you would like to get out of the mortgage due to reasons like a change in your life goals, plans, or needs. Under a VA loan assumption, you sign over your debt to someone else. The buyer will then be responsible for paying back the loan.
What are the Requirements of VA Loan Assumptions?
- The VA loan payments must be current.
- The buyer must be eligible based on the income and credit standards set by the VA.
- The buyer must assume all of the obligations associated with the loan.
- A VA funding fee and processing fee must be paid (details below).
What Does a VA Loan Assumption Mean if You’re a Buyer?
You don’t need to be an active-duty military service member, veteran, or surviving spouse to assume a VA loan. You just have to be eligible and prove that you are creditworthy to be considered as a potential borrower.
Lenders have different requirements but the general factors considered are as follows:
- Credit score (580 to 620)
- 41% debt-to-income ratio (monthly debt payments divided by your gross income per month)
- Steady income
Other costs borrowers need to cover when assuming a VA loan:
- You are required to pay a VA funding fee (0.5% of the VA loan) to the Veteran’s Affairs 15 days after assuming the loan.
- You need to pay a processing fee of at least $300.
- You need to pay a credit report fee.
You’re exempted from paying the VA loan assumption funding fee if you’re a veteran who is currently receiving or entitled to receive VA benefits for a disability obtained while in service. The surviving spouse of a veteran who died from a disability incurred during active service or if they perished while in service is also exempted.
What Does a VA Loan Assumption Mean for Sellers?
You need to meet the requirements set by the lender for VA loan assumptions and that includes being current on your VA home loan payments.
In terms of your VA loan entitlement, it won’t be restored unless the new borrower pays the loan in full. If you wish to restore your VA loan entitlement right away and the buyer is a veteran or an active-duty service member, you should obtain a Substitution of Entitlement wherein the borrower uses their own VA loan benefit so yours won’t be tied up to the property. In so doing, you may be able to use your VA loan benefits in the future.
As a seller, you need to understand the release of liability. When you transfer your VA loan to someone else, you need to request and obtain a release of liability from the lender that issued the VA loan to you. The release of liability protects your credit report in case the new borrower misses payments or if they default on the loan.
What are the Benefits of a VA Loan Assumption?
For borrowers:
- You don’t need to be a veteran, active-duty service member, or a surviving spouse in order to be eligible for a VA loan assumption.
- You will pay less VA funding fees (0.5% of the loan), appraisal fees, and closing costs than if you apply for a new loan.
- You may get a low mortgage interest rate especially if the VA loan had a lower rate when it was originally closed.
- You take over the VA loan without changing its terms.
For sellers:
- You can get out of the VA loan.
- You can sell the house easily especially if the home was closed with a low-interest rate.
- You will have the negotiating power because you’ll set the asking price.
What are the Disadvantages of a VA Loan Assumption?
For borrowers:
- You need to meet general eligibility requirements including your income and credit score.
- You may need to pay a large down payment if the purchase price is greater than the remaining VA loan balance.
For sellers:
- If the buyer is not in the military, your VA loan entitlement won’t be restored until the loan is fully paid.
- You will be held liable and your credit will take a hit if the buyer misses payments or defaults on the loan if you fail to get a release of liability from the lender.
It must also be noted that lenders are not required to issue an assumable mortgage. Some of them don’t have the automatic authority to do so and must pass over the request to the VA for approval.
What are the Potential Challenges of a VA Loan Assumption?
Once the mortgage transfer of your VA to another borrower is successful, you still can’t take out another VA loan (VA loan entitlement restoration) unless the new borrower pays the loan they got from you in full. It may take years before your loan entitlement is restored.
Aside from that, you may also be held responsible if the new borrower defaults on the VA loan they assumed from you. Therefore, a VA loan assumption may not be the best option if you’re eyeing to buy a new property afterward. But this only applies if you fail to obtain a release in liability.
Can the VA Home Loan be Assumed Once the Borrower Dies?
What about assuming a VA loan after death? If the borrower of the VA loan dies before paying off the mortgage in full, the surviving spouse would take over the debt. If the borrower doesn’t have a spouse or a co-borrower, the borrower’s estate will be responsible for the debt.
If the co-borrower or the surviving spouse, for some reason, wants to get out of the VA loan, they may find an eligible buyer who can take over the debt. It could be a veteran, an active service member, or even any of the children of the deceased veteran borrower.
Can You Transfer a VA Loan to Another House?
No, you can’t transfer a VA loan to another house since mortgage loans are approved based on factors that are specific to the property that borrowers intend to purchase. VA loans are approved only when the property in question has passed the stringent guideline set by the Veteran’s Affairs.
Conclusion
Can a VA home loan be transferred to another person? Yes, it can. It’s an attractive option for sellers who wish to get out of the VA loan and for buyers who are looking to enjoy the many benefits of a VA loan like low-interest rates and minimal closing cost. But just like any other type of loan, a VA loan assumption comes with its cons.
For buyers, they have to meet the credit score and income requirements to be deemed eligible for the VA loan assumption. They may also be required to pay a large down payment if the seller’s asking price is high. For sellers, they need to make sure that the home loan payments are current for it to be eligible for the VA loan assumption. If they don’t secure a release in liability, they may also be held liable if the new borrower fails to meet the terms of the loan, which includes getting a negative mark on their credit report. If the new borrower isn’t in the military, the seller’s VA loan entitlement won’t be restored until the loan is paid in full.
These are the things you need to factor in whether you’re a seller or a buyer who’s considering a VA loan assumption or taking over a mortgage from a family member. You should do your research well so that you know what you’re getting yourself into.
Aidan has been writing about personal finance for over 6 years. Prior to this, he worked as a Corporate Finance Analyst where he specialized in Due Diligence, Company Valuations and more. He is a CFA charterholder.
