Obtaining a mortgage with a VA Assumption, gives options for primary home buyers, especially in a shifting market with interest rates climbing.
One of the unique features of VA loans is that they can be assumable, which means that the mortgage can be transferred from the original borrower to a new borrower. We will unpack everything you need to know about VA loan assumption, what an assumable VA loan is, the benefits and drawbacks of VA loan assumption, eligibility requirements, and how the whole process works.
What is an Assumable VA Loan?
An assumable VA loan is a mortgage loan that is guaranteed by the U.S. Department of Veterans Affairs (VA) and can be transferred to another borrower. It allows a homebuyer to take over the existing loan of a seller, without having to go through the process of applying for a new mortgage.
This means that the new borrower takes over the existing mortgage and assumes responsibility for making the payments. In order for a VA loan to be assumable, the lender must approve the transfer, and the new borrower must meet certain eligibility requirements.
Benefits of VA Loan Assumption
Assuming a VA loan offers various advantages. It is an attractive option for veterans and active-duty members and in some cases non-military associated buyers by enabling them to benefit from current low interest rates and avoid private mortgage insurance (PMI) without having to apply for a brand new mortgage.
VA loan assumption can benefit the original borrower who can transfer the mortgage to a new borrower without having to go through the troubles of a full traditional sale of the property, particularly if they are facing financial difficulties and can no longer make mortgage payments.
When the new borrower assumes the VA loan, the original borrower is freed from any liability for the mortgage and their eligibility is returned to them in most cases. By leveraging an assumable VA loan, buyers gain access to more affordable real estate options and more favorable terms than with some other traditional mortgage loan products.
Cons of VA Loan Assumption
While there are benefits to assuming a VA loan, there are also drawbacks to consider. First, assuming a VA loan may not be the best option if interest rates have decreased since the original mortgage was obtained. In this case, the new borrower may end up with a higher interest rate than if they had obtained a new mortgage.
Assuming a VA loan can also be risky for the new borrower if the real estate values have decreased since the original mortgage was obtained. In this case, the new borrower may end up paying more for the property than it is worth. Buyers must be aware of these risks before deciding to pursue this type of transaction. There are options such as getting an appraisal as a buyer to ensure that the sale price you have worked out is still current with the market around the home.
Another huge drawback for many people is that they cannot come up with the difference for the sale price to the actual loan price. Example if the sale price is $400K and the loan is at $300K the buyer has to come up with $100K for the current seller.
Are VA Loans Assumable?
Generally, yes, provided that lenders approve the transfer and the new borrower meets certain eligibility requirements. But there are some cases where VA loan assumption can be Restricted.
Is there a type of VA loan that one can assume?
The VA does not allow assumptions on home loans that were closed before March 1, 1988, or on loans that were closed after that date but do not have the assumption option included in the original note.
Eligibility Requirements for Assumable VA Loans
To assume a VA loan, the borrower assuming the loan must meet the VA's eligibility requirements, which are as follows:
- Eligibility of the Original Borrower: The original borrower must have obtained the VA loan through his or her loan entitlement and must have complied with all the VA loan requirements at the time of loan origination.
- Creditworthiness: The borrower assuming the VA loan must meet the VA’s creditworthiness standards, which include having a satisfactory credit score and a steady income to make mortgage payments.
- Occupancy Requirements: The borrower assuming the VA loan must intend to occupy the property as his or her primary residence.
- Assumption Approval: The lender and the VA must approve the assumption of the home loan, and the borrower assuming the loan must agree to take over the responsibility of the mortgage payments.
- VA Loan Limits: The borrower assuming the VA loan must be aware of the VA loan limits, which may restrict the amount of the loan that can be assumed. The VA loan limits varies by county and is based on the median home price in the area.
It is important to note that assuming a VA loan does not guarantee approval. The lender and the VA must approve the assumption, and the borrower assuming the loan must meet all eligibility requirements.
Veteran Requirements
To qualify for a VA loan and assume the actual eligibility attached to the VA loan in the assumption certain service and real estate ownership requirements must be met by veterans.
These requirements include serving at least 90 days during wartime or 181 days during peacetime, having an honorable discharge, and owning a home or having previously owned one. For National Guard members, they need to have served a minimum of 90 days of active service, including at least 30 consecutive days under Title 32, Sections 316, 502, 503, 504, or 505. Moreover, veterans must obtain a Certificate of Eligibility (COE) that verifies their eligibility for a VA loan and specifies the amount of loan entitlement available.
Active Military Service Requirements
Active military service members must meet the same eligibility requirements as any other borrower to assume a VA loan. This includes having a stable income and meeting the credit score requirements. However, active military service members may also have additional requirements to meet depending on their deployment status and location. For example, if a service member is deployed and their spouse will be assuming the loan, the spouse may need to provide a power of attorney or other documentation to act on the service member’s behalf. Additionally, if the service member is stationed overseas, they may need to provide additional documentation related to their service and housing status.
Credit Score and VA Loan Income Requirements
Assuming a VA loan does not have specific credit score or income requirements. However, lenders who finance VA loans typically have their own credit and income requirements that borrowers must meet in order to qualify for a loan assumption.
Generally, lenders prefer to see a credit score of 620 or higher, and a debt-to-income ratio of 41% or lower. However, these requirements can vary depending on the lender and the borrower’s overall financial situation, make sure to talk to the lender that you are assuming the loan from to find out all of the terms and conditions. This is not a situation where you can shop for a lender, remember you are assuming (taking over the loan) using the current lender.
Loan Balance and Terms
The loan balance and terms of the assumable VA loan must also be considered. With a sale price that has a gap from sale price to assumable price the new buyer will have to come up with the cash upfront to finalize that purchase. Creative financing or cash are typically the answer to pay the gaps! Additionally, the terms of the original loan, including the interest rate, payment schedule, and loan term, will remain the same for the new borrower.
Lender Requirements
Lenders must approve the transfer of the VA loan to the new borrower. This means that the new borrower must go through the current lender’s process.
The lender will review the borrower’s credit score, income, and debt-to-income ratio to determine if they are eligible to assume the loan. If the lender approves the transfer, the new borrower will need to sign a new loan agreement and obtain a release of liability from the original borrower.
Also keep in mind, the lender will charge an assumption fee for processing the assumption of the home loan.
Process for Assigning an Assumable VA Loan
The process for assigning an assumable VA loan is similar to obtaining a new VA loan:
- The parties will need to understand the lender’s process.
- The new buyer will need to have their information ready to qualify with the current lender to take over the loan
- If the eligibility needs to be released from the seller the new buyer must ensure that they have eligibility to take over the loan’s eligibility requirements set by the VA.
- Depending on the lender both parties should have all information processed and the buyer will have all financial responsibility put on them and in most cases the ability from the VA will be transferred to the buyer as well.
ADPI Pro Tips
- As the buyer evaluate the property: Before assuming the loan, conduct a thorough evaluation of the property. Look for any major repairs or issues that may impact the value of the property. or your ability to repay the loan.
- Check the loan balance: Verify the outstanding balance on the VA loan before assuming. This will give you an idea of the amount you will need to pay upfront, as well as the amount you will be responsible for paying each month.
- As the seller ensures that you get a release letter from your lender and the VA for both financial and VA Loan eligibility requirements. This will ensure you can freely purchase using your VA loan benefits again!
This blog was written in collaboration with our absolutely amazing DoD SkillBridge employee: David
