Hot Topic: Let’s Talk VA Loan Assumptions
Back
28 January 2025
Hot Topic: Let’s Talk VA Assumptions
For many military service members, veterans, and their families, a VA loan is a valuable benefit that makes homeownership more accessible. One unique feature to a VA loan is that in some instances, the loan can be assumed by another buyer, even if they are not eligible for VA loan benefits themselves. This process can be a win-win for both the seller and buyer, but it requires careful planning and understanding of the rules. It’s particularly important to note that unless the buyer is also a VA-eligible borrower who substitutes their entitlement as part of the assumption process, the seller’s VA entitlement remains tied to the loan until it’s paid off.
What Does it Mean to Assume a VA Loan?
Assuming a VA loan means that a qualified buyer takes over the existing VA loan from the current homeowner. The buyer then takes responsibility for the remaining mortgage payments, interest rate, and loan terms.
What are some of the Benefits to a Buyer for Assuming a VA Loan?
- A buyer can benefit from assuming a mortgage with a below-market interest rate.
- Assuming a VA loan typically involves fewer closing costs than a traditional home purchase.
What are some of the Possible Challenges for a Buyer Assuming a VA Loan?
- A buyer using a VA loan assumption will not be working with an experienced Loan Officer or Mortgage Broker. The buyer will be working directly with the loan servicer of the current VA loan to obtain approval for the assumption.
- VA assumptions generally take more time than a traditional home purchase using a standard VA loan. While historically this process would take 90-120 days, in early 2024 the VA amended this timeline requiring VA loan servicers to approve a requested assumption within 45 days.
- The buyer is assuming the exact terms of the current mortgage, which can mean in many instances the buyer will need cash to complete the assumption. Let’s use an example of a property currently listed for $500,000 with an existing mortgage balance of $200,000. In this instance the borrower would need to have $300,000 down payment to structure the purchase with an assumable loan balance of $200,000.
What are the Steps to get Started on a VA Loan Assumption?
- Determine Eligibility: While anyone can assume a VA loan, the buyer must meet the lender’s credit and income requirements. If the buyer is not VA-eligible, the seller’s VA entitlement will remain tied to the loan.
- Notify the Lender: The seller must contact their loan servicer to initiate the assumption process. The lender will provide the necessary paperwork and approval guidelines. The buyer will need to submit an application to the lender, including financial documents such as pay stubs, tax returns, and credit reports.
- Wait for Lender Approval: The lender will review the buyer’s financial qualifications and determine if they meet requirements to assume the loan. This process can take some time, so patience is key.
- Pay the Assumption Fee: VA Loan assumptions typically come with a fee which can range from a few hundred dollars to 1% of the loan balance. The buyer and seller can negotiate who pays this fee.
- Address the VA Entitlement Issue: If the buyer is not VA-Eligible, the seller’s VA entitlement will remain tied to the loan until it’s paid off. This could limit the seller’s ability to use their VA loan benefit in the future. If the buyer is VA eligible, they can substitute their entitlement, thus freeing up the seller’s entitlement.
- Close the Assumption: Once the lender approves the assumption, the buyer and seller will sign the necessary paperwork to transfer responsibility for the loan. The buyer may also need to pay any outstanding property taxes, insurance, or other fees associated with the home. Enlisting the assistance of a title & escrow company would help eliminate risk for lender, buyer, and seller during a VA loan assumption.
What are some Additional Considerations with a VA Loan Assumption?
- Release of Liability: Sellers should request a release of liability from the lender once the loan is assumed.
- Due Diligence: Buyers should carefully review the loan terms, including interest rate, remaining balance, and any prepayment penalties.
Is Assuming a VA Loan Right for You?
Assuming a VA loan can be a great option for both buyers and sellers, but it’s not without risk or complexity. It’s crucial to work with a knowledgeable real estate professional to navigate the process smoothly. If you are considering assuming a VA loan or selling a home with an assumable VA loan, take the time to understand the requirements and seek expert guidance. With the right preparation, this unique feature of VA loans can be a powerful tool for achieving your homeownership goals.
Back to Blogs