Everything You Need to Know About VA Assumable Loans

Everything To Know About VA Loan Assumption

Wondering if VA loans can be transferred to another borrower? The simple answer is, yes, they can. This unique feature allows individuals who may not typically qualify for VA loan benefits to benefit from the potential cost savings associated with these loans due to their assumable nature.

Exploring the Concept of Assumable VA Loans 

One key aspect to understand about VA loans is their ability to be assumed by another party. This enables a new borrower to take on the existing terms of a VA loan, regardless of their eligibility for initially obtaining a VA loan.

This means that a home buyer could inherit the same mortgage payments that the seller was making. If the original loan had an advantageous interest rate, the ability to assume this loan can serve as a significant advantage.

While many types of government loans offer this assumable feature, it’s less common among conventional mortgages. This characteristic of VA loans provides a distinct advantage for both home buyers and sellers.

Eligibility for Assuming a VA Loan 

The capability to assume a VA loan is indeed available, but it’s not an opportunity open to everyone indiscriminately.

Initially, to secure a VA loan, the borrower must satisfy certain criteria related to military service. Beyond these service prerequisites, lenders also scrutinize the borrower’s financial standing to affirm their capability for loan repayment.

However, for those looking to assume a VA loan, the military service qualifications of the original borrower do not apply. This opens the door for non-veterans to take over a VA loan. Despite this, like the initial loan process, the prospective borrower must demonstrate their financial ability to the lender to be considered eligible.

Qualifying to Assume a VA Loan 

While it’s true that individuals without military backgrounds can assume a VA loan, approval from the lender is a prerequisite.

The assumption process is distinct from obtaining a new mortgage. Rather than comparing rates, you’ll need to demonstrate your financial reliability to the lender who originally issued the mortgage to the seller. Approval of your financial standing by the lender is necessary to proceed with assuming a VA loan.

The VA itself does not set specific criteria for potential borrowers. However, lenders typically impose their own financial requirements. Common criteria include:

• Credit Score: A minimum median credit score of 580 is required by most lenders for a VA loan assumption.
• Down Payment: Although VA loans usually don’t require down payments, there might be instances where the assuming borrower needs to make one.
• Income: Sufficient income to afford the loan payments is necessary.
• Funding Fee: Assuming a VA loan incurs a funding fee of 0.5% of the loan’s balance.

Preparing for a VA loan assumption means ensuring you meet these general criteria. Yet, it’s important to remember that lender requirements can vary. 

Steps to Assume a VA Loan 

If you’re interested in assuming a VA loan, follow these steps:

1. Verify if you meet the VA loan’s military service criteria. Veterans can potentially replace the seller’s eligibility with their own.
2. If not a veteran, your financial credentials will be scrutinized. Be prepared to submit documentation proving your income, debt obligations, and creditworthiness.
3. The lender will assess if you qualify to assume the VA loan. The timeline for this determination can vary.
4. Upon approval, formalize the assumption agreement, cover the funding fee, and make any necessary down payment.

Finding a VA Assumable Mortgage 

To find a VA loan to assume, consider these resources:

• Real Estate Agent: They can assist in locating properties with assumable VA loans.
• Multiple Listing Service (MLS): With access through a real estate agent, the MLS offers a wide array of listings, including those with assumable loans.
• Print Ads: Sometimes, local newspapers can reveal unexpected opportunities.
• Specialized Websites: Platforms like TakeList.com or Zumption.com cater specifically to assumable loan listings.

Though finding the perfect assumable loan property may require patience, the effort could be highly rewarding.

VA Loan Entitlement and Assumption 

The issuance of an original VA loan hinges on the borrower’s entitlement. If the new borrower has sufficient entitlement, they can request to swap entitlements with the seller. However, if the new borrower lacks sufficient entitlement, the seller’s entitlement remains linked to the property until the loan’s full repayment.

Sellers should ensure the new borrower has enough entitlement for a substitution to avoid tying up their own entitlement, which would restrict their ability to utilize it for future VA loans until the current loan is fully repaid.

Liability Release Following a VA Loan Assumption 

After the assumption of a VA loan, the original borrower’s responsibility for the mortgage doesn’t automatically disappear. The seller must secure a release of liability from the lending institution.

Without this essential formality, the original borrower could be held accountable for any missed payments by the new borrower, potentially affecting their credit or leading to financial consequences if the new borrower fails to meet their obligations.

Therefore, it’s crucial for the home seller to ensure, before finalizing a VA loan assumption, that the lender will issue a release of liability upon request. If the lender is hesitant to provide this, it could be a significant deterrent.

Advantages of Assuming a VA Loan Assuming a VA loan comes with its set of benefits, including:

• Potential savings on closing costs and appraisal fees.
• A lower funding fee of 0.5% of the loan amount compared to standard VA loans.
• Access to competitive VA loan interest rates.
• Restoration of the seller’s full VA loan entitlement if a veteran assumes the loan.
• No military service requirement for eligibility.

For buyers, the most appealing benefits include possibly securing a lower interest rate than current market rates and saving on upfront costs.

Disadvantages of Assuming a VA Loan 

However, there are also drawbacks to consider:

• Lender approval is not guaranteed.
• Borrowers must satisfy the lender’s criteria for credit score and income.
• The assumption process can be extended, especially if VA office approval is required.
• If a civilian assumes the loan, the veteran’s entitlement remains tied to the loan.

Both buyers and sellers should proceed with caution regarding a VA loan assumption. Buyers need to ensure they qualify, while sellers must consider the implications on their VA entitlement, which could affect future home purchases.

Deciding on a VA Loan Assumption 

The key question isn’t merely about the assumability of VA loans but whether this option aligns with your financial goals and situation.

In Summary 

VA loans are assumable, offering attractive lower interest rates that may benefit some buyers and sellers. However, it’s important to assess the pros and cons thoroughly before proceeding.

If you’re considering starting the loan application process, getting preapproved is an essential first step.