The ability to assume a VA Loan is a great feature of the VA Home Loan Benefit. It allows a Veteran or active duty homeowner to sell their home to another willing and able buyer and have the new buyer assume the seller’s existing VA home loan. The buyer does not need to generate a new loan to purchase the house. This becomes a popular feature when interest rates rise, because the older existing loans will usually have lower rates.
What’s The Benefit of Assuming a VA Loan?
The main benefit of assuming a VA loan lies in the terms of the loan. If the current existing terms of the VA loan are more desirable than the current market terms, the VA Loan Assumption becomes valuable to the potential home buyers. If the buyers are eligible to assume the loan and can get a much lower interest rate, it’s a win-win for the buyer and the seller. There’s no need for a new mortgage with closing costs and no need for a property appraisal.
Here’s an example of a set of terms that would make the VA Loan Assumption desirable: If an existing VA loan has a fixed rate of 3.25% interest on a 30 year loan, and the current market interest rates are 5.0%, an eligible VA home buyer could save a lot of money assuming the existing loan, rather than getting a new mortgage at 5.0% interest.
When interest rates rise and homes become harder to sell as prices drop, assumable loans can give sellers an advantage in marketing their home to VA buyers. In the past few years, we have witnessed the lowest interest rates in decades. Many of the loans will be valuable if and when interest rates rise in the near future. Existing VA loans with 3.5% interest will be valuable assets if interest rates get up to 6% or 7%, which is likely to happen at some point.
Who Can Assume a VA Home Loan?
Technically, anyone can assume a VA home loan, as long as they have all of the other credentials required to be approved for a mortgage.
Here’s are the credentials required to assume a VA home loan:
- The existing loan must not be in default.
- The buyer must qualify for the mortgage based on their income and credit score.
- The buyer must assume all the obligations of the existing VA mortgage.
- There is a 0.5% processing fee to assume the loan.
It’s important to know that a Veteran can only keep their remaining VA Entitlement Benefits if their loan is assumed by a Veteran or active duty home buyer. A non-VA buyer can assume the loan, but the seller’s VA Loan Benefits would be tied up with the old loan until it was paid in full. For this reason, most VA loan assumptions occur between a VA seller to a VA buyer.
It’s also important for the seller to receive a Release of Liability form once the VA Loan Assumption is complete. This document conveys that the seller is released from all future liability of the loan and that all of the existing loan terms have passed to the buyer.
How do VA Loan Assumptions Work?
To make this easy, I’ll use a couple of examples to explain the VA Loan assumption process. There are basically two different scenarios that can take place here.
Joe and Sally own a home in Fountain, CO which was purchased using VA loan financing. Joe and Sally decide to put their home on the market for sale, so they list it with Great Colorado Homes.
In the listing remarks, their agent states that Joe and Sally’s loan is assumable. A new civilian buyer is interested in assuming the mortgage at its current balance and current interest rate.
The new buyer must qualify for the VA Loan Assumption using a process that is like that of a traditional new home purchase. They would apply for the Loan Assumption through the owner’s current mortgage company.
The current mortgage company then submits the assumption application to the VA for approval. Once approved, the new buyer would be able to assume the mortgage.
TIP: When a Civilian buyer assumes a VA Home Loan, the portion of VA Entitlement currently used for the Veteran owner, is not reinstated. This does carry a slight risk. If a short sale or foreclosure were to occur, the Veteran would lose that portion of their eligibility which was attached to the VA loan.
Joe and Sally own a home in Fountain, CO… same scenario as above… however, this time Joe and Sally sell their home to a military buyer who is qualified to use their VA Loan Eligibility. The military buyer applies to assume the existing VA Loan through the current mortgage servicer of Joe and Sally’s loan. It is then submitted to the VA for approval.
When the new military buyers assume Joe and Sally’s loan, their VA entitlement takes the place of Joe and Sally’s entitlement, which then releases Joe and Sally from any liability on the loan. Now Joe and Sally can request restoration to regain their full VA entitlement back. For this reason, Scenario 2 is much better than Scenario 1.
VA charges a 0.5% Funding Fee for the assumption loan which is calculated on top of the loan amount.
Special Note: Loans Serviced by lenders who have automatic authority may process assumptions without sending every loan to the appropriate VA Regional Loan Center. Loans serviced by lenders who don’t have automatic authority must send all assumption requests to the appropriate VA Regional Loan Center. These reviews are subject to the VA’s turn times.
Why Would a Seller Want to Have Someone Assume Their VA Mortgage?
Let’s assume Joe and Sally have a very low-interest rate of 3.5% that is fixed for 30 years on their VA loan, and current market interest rates are 4.5% for a VA 30-year fixed loan. If someone were to assume their mortgage, they would be able to assume the lower interest rate of 3.5% on the current balance of the loan. Obviously, if Joe and Sally are selling their home for more than what they owe, the new buyer would need to pay the difference out of pocket.
Sales Price: $300,000
Joe and Sally’s VA Mortgage Balance: $250,000
Down Payment Required: $50,000
In this scenario, the buyer would need to come in with a down payment as well as any additional loan fees associated with a VA Assumption. However, generally speaking, there are fewer fees associated with an assumption than with a full home loan purchase.
Special Note: Lenders and loan servicers are under no obligation to grant a VA Loan Assumption.
If you are a Real Estate Professional and have questions regarding this process, feel free to contact me directly through the info in my blog signature below. If you are a homeowner and have questions regarding the VA Assumption process, contact your loan servicer to see if they allow for VA Assumptions.
If you are a home buyer and have questions regarding your VA Loan, I’d love to hear from you. I’m here to help if you need me.
Jamie Fischer is a loan officer with Veterans Lending Group. He knows the VA loan process inside and out. You can find out more about Jamie on his person page HERE.
Veterans Lending Group is a registered tradename of CrossCountry Mortgage, Inc. NMLS 3029, NMLS 1664323 (www.nmlsconsumeraccess.org). All loans subject to underwriting approval. Certain restrictions apply. Call for details. Certificate of Eligibility required for VA Loans. Not all borrowers will qualify. Rates subject to change without notice.
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