VA loan assumptions can be one of the most sought after products in a market where interest rates are on the rise.
Used as a primary home initially assuming a VA loan available to both civilians and the Veteran population! Once used as a primary home the assumed VA loan can move into an investment! Investing can come in many different forms and many are looking into VA loans as a wonderful way for many people to get in on loans that can be in the form of interest rates in the low 2s (2%)!
Definition of Loan Assumption
An assumable mortgage is a type of mortgage that allows a homebuyer to take over or “assume” the existing mortgage of the seller, instead of obtaining a new mortgage. In other words, the buyer agrees to take over the remaining mortgage payments and terms of the seller’s loan, including the interest rate, payment schedule, and other terms and conditions.
Assumable mortgages are typically found in two types of mortgage loans: FHA and VA loans. With an assumable mortgage, the buyer takes on the seller’s mortgage balance, which means the buyer does not have to obtain a new mortgage and go through the typical mortgage application process. This can be beneficial for the buyer if interest rates have risen since the original mortgage was taken out, as they can take advantage of the lower interest rate on the existing mortgage.
However, not all mortgages are assumable, and even assumable mortgages may have restrictions and requirements that the buyer must meet in order to assume the loan. The lender must also approve the loan assumption and may require the buyer to meet certain creditworthiness and financial requirements.
Overview – How to assume VA loans
To assume a VA loan you must first find a realtor who understands the process, find a seller who is willing to let a buyer assume their loan, work out the details of the contract and start getting your information to the lender who currently holds the loan.
Sounds simple, right? Well with the right team of realtor and lender this can be done and can save you thousands of dollars! Let’s jump into getting you as a buyer or a seller educated to help you make the right decisions as to if the VA assumption process would help you obtain or get rid of a property!
Understanding Your Eligibility Requirements
When assuming a VA loan the buyer needs to understand how to become eligible as a VA loan is attached to VA eligibility.
With so much information out there how does one know if they are eligible? Do you believe you must be a VA loan eligible buyer? Well I have some amazing news for you, you don’t need to have VA eligibility to assume a VA loan.
This is one of the only ways a civilian with no affiliation to the military can get a VA loan! Also, like I plan to do in my next primary home purchase, if a veteran is not wanting to use their own eligibility or is maxed out with their own eligibility because they are holding their other VA purchased properties as investments the eligible persons can obtain the loan and in the agreement with the seller negotiate holding the current owner’s VA eligibility!
Like stated earlier there are creative ways for buyers to get prepared to purchase in an environment with interest rates that we haven’t seen so high in years!
Let’s continue to dive into other areas that will be important to focus on when looking at acquiring a property,as a primary home using the already established VA loan that is in place with the current owners!
Active Duty Military Service
Active duty military service comes with many benefits to include in some cases the ability to get a VA loan to finance a primary home! WIth that being said the VA loan with zero down can allow a brand new real estate investor to acquire their first home and portetal future rental or a way to sell it and gain some capital for their next purchase. Many active duty and veterans are looking to capitalize on the sacrifices they engage in to include relocation for some every couple of years!
When an active duty member gets 4 sets of orders in 8-10 years if prepared they can acquire an investment property at those places and start their side hustle and in some cases a real opportunity to create passive income! Do you know what your Military Financial Freedom Number is? Check out ADPI’s free book download located on the main site to see how you can use the above strategy to create generational wealth by capitalizing on your benefits!
Income Ratio Requirements
Income ratio requirements are a set of guidelines that mortgage lenders use to evaluate a borrower’s ability to repay a mortgage loan. The two primary income ratios that lenders use are the front-end ratio and the back-end ratio.
The front-end ratio, also known as the housing expense ratio, measures the borrower’s monthly housing expenses (including mortgage payments, property taxes, and homeowners insurance) as a percentage of their monthly income. Generally, lenders prefer a front-end ratio of no more than 28% to 31% of the borrower’s monthly income.
The back-end ratio, also known as the debt-to-income ratio (DTI), measures the borrower’s total monthly debt payments (including mortgage payments, car loans, credit card payments, and other debts) as a percentage of their monthly income. Lenders typically prefer a back-end ratio of no more than 36% to 43% of the borrower’s monthly income, although some lenders may allow higher ratios depending on other factors.
Credit Report and Minimum Credit Score
In addition to these ratios, lenders may also consider other factors when evaluating a borrower’s ability to repay a mortgage loan, such as credit score, employment history, and overall financial stability. It’s important for borrowers to understand these income ratio requirements and work with their lender to ensure that they can comfortably afford their mortgage payments. If a borrower’s income ratios are too high, they may need to consider a lower-priced home or reduce their debt load to qualify for a mortgage loan.
Minimum credit scores should be talked about with your lender. There are many factors that go into determining if the credit score along with the other factors are acceptable for both new loans and assumable loans. One of the nice things about the VA loan program is that there are not mandated minimum credit scores!
Previous Homeowner Status
Homeowner status refers to the legal and financial status of a person who owns a home. When someone purchases a home, they become a homeowner and are legally responsible for the property and all associated costs and responsibilities.
As a homeowner, you will have certain legal rights and responsibilities, the right to live in and use the property as you see fit, subject to local zoning and land use laws and the responsibility to maintain the property and ensure that it meets all applicable health and safety codes. This includes making repairs as needed and keeping the property in good condition.
Homeowners are also responsible for paying a variety of expenses related to the property. This may include mortgage payments, property taxes, insurance, utilities, and maintenance and repair costs. Homeowners will in some cases be subject to additional fees and assessments from their homeowner’s association (HOA) if the property is located in a planned community, make sure this is included by your title company as part of the search even in an assumption this will become both the buyer and seller’s responsibility to ensure transfer.
Overall, being a homeowner comes with both rights and responsibilities and this will be important to the lender. Are you a homeowner in the past who has paid all of your debts and kept your property current? These are factors lenders will consider when qualifying you for the transfer of the loan.
Benefit of a VA Loan Assumption
There are several benefits to both the buyers and sellers when a VA loan is assumed! To try to make it an easier decision if this could be right for you as a seller or a buyer lets look at the following:
Seller
- A VA assumption listed to be available in your advertisement can allow your realtor to advertise that you are military affiliated which may make some buyers more intrigued to look at buying one of their brother or sister In Arms home. There is something that goes along with amazing relationships!
- As the seller you may be in a position to pass your amazing interest rate onto another buyer.
- People will pay for your rate, this means with a favorable rate you may find your house flying off the market at full price in a market that is taking longer for inventory to move
- You can release all financial obligations and even move the VA eligibility over to the next buyer if they have eligibility from the VA
- The best part of this transaction is the wiggle room it gives you to network and try to find buyers that could make the deal quick and most of the time if it is a military member you can be assured that their credit and pay stubs will make them a viable candidate to purchase your home.
Buyer benefits
- No down payment: VA loans typically do not require a down payment, which can make it easier for buyers to purchase a home without having to save for a large down payment.
- No mortgage insurance: VA loans also do not require mortgage insurance, which is typically required for other types of loans when the borrower puts less than 20% down. This can result in significant cost savings over the life of the loan.
- Lower interest rate: Assuming a VA loan with a low interest rate can result in lower monthly mortgage payments and significant cost savings over the life of the loan.
- Lower closing costs: Because the loan is already in place, the buyer may be able to save on certain closing costs, such as origination fees and appraisal fees (these fees are typically significantly reduced because you are not starting an entirely new loan).
- No prepayment penalty: VA loans do not have prepayment penalties, which means the buyer can pay off the loan early without incurring any additional fees.
- Assumable loan: If the buyer decides to sell the home in the future, the VA loan can be assumed by a qualified buyer, which can be an attractive feature for potential buyers and increase the resale value of the home.
VA Loan mortgage Funding Fee Waiver or Reduction
With a VA assumption the funding fees, which are fees from the VA typically tacked on and financed within your loan, can be reduced substantially. This is another amazing money saving feature of the VA assumption. See below for the VA funding fee chart and note that there are changes coming as of April 7, 2023.
Table: VA Funding Fee Rates for Loans Closed on or After April 7, 2023
| Loan Type | Down Payment | First Time Use | Subsequent Use |
| Purchase loan | 0% | 2.15% | 3.3% |
| Purchase loan | 5% – 9.99% | 1.5% | 1.5% |
| Purchase loan | 10% or more | 1.25% | 1.25% |
| Cash-Out Refinance | N/A | 2.15% | 3.3% |
| IRRLs | N/A | 0.50% | 0.50% |
| Loan Assumptions | N/A | 0.50% | 0.50% |
| Loans when you have a disability rating of 10% or more | N/A | N/A | N/A |
Release of Liability for Original Borrower/VA Loan Entitlement Retention
Release of Liability is one step that no homeowner should skip! If you are saving the borrower tons of money in fees and processing obligations don’t forget to make sure you take care of yourself in the deal too! Release of liability is exactly what it says, you move from the party responsible for repayment of the loan completely.
When the new homebuyer completes their financial screening from the lender and the loan is moved to them the seller needs to ensure to get a release of liability letter or agreement from the buyer. This should be completely signed and executed before all parties walk away from the table of the sale! This is sometimes called a waiver in the real estate world.
VA Mortgage Loan Interest rate
An interest rate in real estate is the rate at which a lender charges borrowers for the use of money. When you take out a mortgage to purchase a home, you will be charged an interest rate on the amount you borrow. This interest rate is a percentage of the total loan amount and is added to your monthly mortgage payment. The interest rate you are offered will depend on a number of factors, including your credit score, the loan amount, the term of the loan, and the type of loan you are applying for.
One of the key decisions you will need to make when obtaining a mortgage is whether to choose a fixed or adjustable interest rate. A fixed interest rate means that your interest rate will remain the same for the life of the loan, which is typically 15 or 30 years. This can provide stability and predictability in your monthly mortgage payments. An adjustable interest rate, on the other hand, will fluctuate over time based on market conditions. While adjustable rates can start out lower than fixed rates, they can also rise over time, making it difficult to predict your monthly payments.
In addition to choosing between fixed and adjustable rates, you will also need to consider the term of the loan and the various terms offered by different lenders. Some lenders may offer lower interest rates but with higher closing costs, while others may offer a higher interest rate with no closing costs. It’s important to carefully evaluate all of your options and consider your long-term financial goals when choosing an interest rate and mortgage terms.
Overall, the interest rate is a key factor to consider when purchasing a home and obtaining a mortgage. By understanding how interest rates work and the different options available, you can make informed decisions that best meet your needs and financial situation.
Steps Involved in the Loan Assumption Process
- Home must be in current payment status
- Current owner and potential buyer must come to an agreement on price and the new buyer must show funds to pay the difference between the loan amount and the contract amount. (ex: if the contract amount is $400,000 and the loan is currently at $300,000 the buyer must come up with $100,000)
- New owner must be financially qualified with the lender evaluation
- Assuming buyer will need to pay .5% for the funding fee that goes to the VA
- Processing fee will go to the lender
- The lender will need to have automatic authority as a VA lender. If the lender does not have automatic authority they will need to submit docs to VA, in this case your loan may take longer than the average 30 days to close as this is a step that can be avoided if you do work with lenders who have automatic authority.
Obtain Approval from Lender and the VA
For VA approval the borrower will need the approval listed on what is called a Certificate of Eligibility (COE). A COE allows a veteran, active duty member, or military family member to understand that they can apply for a mortgage using the VA loan program, but it does not guarantee mortgage approval. An actual mortgage and amount for the home purchase is a lender’s decision. Because the lender is the body that will give the loan, the lender will have their own steps for getting a borrower information on what they qualify for.
Along with the VA approval the lender is an vital part of the process as even with an assumable loan the lender will want to ensure that the new homeowner qualifies for just as the current owner does when it comes to credit and ability to take over and pay the loan payments on time.
Gather Necessary Documents (Including Loan Program)
When getting ready to apply for the loan here are some items to have read and waiting for your lender team.
- Pay stubs: The lender will typically request your most recent pay stubs to verify your employment and income.
- W-2 forms: The lender may request copies of your W-2 forms from the past two years to verify your income.
- Tax returns: If you are self-employed or have other sources of income, the lender may request copies of your tax returns from the past two years to verify your income.
- Bank statements: The lender may request copies of your bank statements from the past two to three months to verify your assets and ensure that you have enough funds to cover the down payment and closing costs. (these are typically official statements not screenshots)
- Credit report: The lender will run a credit check to obtain your credit report and credit score, which are used to evaluate your creditworthiness and ability to repay the loan.
- Employment verification: The lender may contact your employer to verify your employment status and income.
- Proof of identification: The lender will typically require proof of identification, such as a driver’s license, passport, or military ID, to verify your identity.
- Purchase contract: If you are purchasing a home, the lender will need a copy of the purchase contract to verify the terms of the sale and the property value. In the assumption cases you will still need the documentation.
ADPI Pro Tips
- Get a release of liability as the seller! Do not skip this step as this will be a document that in the future would clear up any confusion as to who currently owns the property and who is responsible for the repayment of the loan!
