With rising interest rates and higher home prices, the question of assuming a VA loan has come up quite frequently lately. When purchasing a home, you must consider all your options. The ability to assume a VA loan is just one of many benefits that the VA loan offers to current servicemembers and veterans.
What is a VA Loan Assumption?
A VA Loan Assumption is when a buyer/borrower takes over another borrower’s home loan (say, in this case, a seller). A VA Loan Assumption will transfer the remaining loan balance to the new borrower and includes the interest rate and monthly payment. Don’t forget that this depends on whether the new borrower qualifies for the loan, so potential borrowers should talk with a knowledgeable VA lender about loan qualification.
Pros and Cons of Assuming a VA Loan
One advantage to assuming a VA loan is that the new borrowers won’t need to apply for a new loan. VA loan assumption also removes closing costs and appraisal fees, potentially saving borrowers a lot of money.
For sellers, allowing VA loan assumption to broaden the spectrum of potential buyers is advantageous. The ability to offer an assumable VA loan could also be a great marketing tool if the loan interest rate is lower than what’s currently occurring on the mortgage market.
The addition of the VA funding fee can add up quickly on a new loan. Buyers can pay 2.15% of the loan for first-time use and 3.6% for consecutive loans. If a borrower can assume the VA loan, they only pay a 0.5% VA Funding Fee, saving thousands of dollars. On the other hand, potential borrowers assuming the VA loan that meets these requirements may be exempt from paying a VA Funding Fee:
- Veterans receiving VA compensation for a service-connected disability
- Veterans rated by the VA to be eligible to receive compensation following a pre-discharge disability exam.
- Veterans entitled to receive VA compensation for a service-connected disability
- Surviving spouses of veterans who died in service (or from a service-connected disability)
Though a VA loan assumption can be a great deal, not all lenders offer the ability to assume a VA loan. Sellers must research this possibility and ensure buyers can assume the loan before offering this benefit.
Although it doesn’t necessarily have to be a military member or veteran that assumes the loan, the seller’s VA loan entitlement will stay with the loan if a civilian does assume it. If a seller’s entitlement is tied up, it could potentially throw a wrench into any plans for the seller to use their VA entitlement for another home.
Need for a down payment: if the home is selling for more than what is currently owed on the property, the buyer/borrower must pay the difference as a down payment. For instance, if a home is being sold for $300,000 and the loan balance is $250,000, the new borrower will need a $50,000 down payment to assume the loan. Make sure to run the numbers on these calculations to ensure that this is the right fit for you. Although a potential lower interest rate is tempting, the high down payment requirement may negate the benefits.
For the Sellers: The Importance of a Release of Liability
An important note for sellers that offer an assumable VA loan to buyers is that loan liability does not automatically transfer when the loan is assumed. To avoid issues, sellers will need to request a release of liability from their current lender. Without this release, the original borrower could take a credit hit if the borrower assuming the loan goes into foreclosure/default.
A VA loan assumption may be a great advantage to home buyers in the current market. Although a great benefit, sellers and buyers should weigh the costs and benefits of a VA loan assumption to ensure it’s a good fit for their situation. This is where an excellent lending team comes in and why Active Duty Passive Income offers an in-house lending team to assist our members. Be sure to talk with them today to see if VA loan assumption is the best option for you.
For more information on the VA loan, check out our Ultimate VA Loan Guide!