VA loan assumptions can happen for a buyer and a seller who can work out a deal with one another and the buyer can qualify with the current lender.
VA loan assumptions are a bit tricky but in a market where interest rates are up it is a solid option not only for the buyers to capture low interest rates but also for the seller to maximize how much they sell their homes for.
With interest rates higher and buyers having a set amount of money monthly they desire to pay out of pocket for their mortgage payment an interest rate that is 3% higher than it was a year ago can now limit the purchase price some buyers can take on.
For example, I go out and find someone who purchased their home two years ago for $350K and they now owe $335K. If the seller and I could come up with a deal, I qualify with the current lender and purchase the house with $15K out of my pocket to the seller, the difference in payment could be substantial if they have a 2.25% and I can currently qualify for a 6.2%.
Difference in interest rate payment
(principal and interest)
$335K @ 2.25% = monthly payment of $1281.00
$335 @ 6.2% = monthly payment of $2052.00
A difference of $971.00 a month! You would save $971 a month in this scenario!
So let’s go one step further for those out there that say “well then I have to put $15K out of my own pocket”.
The great thing about the assumption is the funding fee is reduced to .5% of the loan therefore you save thousands of dollars being added to your loan depending on if this is your first use of your VA loan or secondary use of your VA loan and you get your $15K back in savings over the months. The recapture time for $15K at a savings of $971 a month is a total of:
15,000 / 971 / 12= 1 year and 3 months! Essentially in one year and three months you already make your 15K back from the savings you will see by assuming the loan.
Now, don’t get me wrong it can be quite the trial for one to get through the process and to get all of their financials in order to purchase a new primary home using the VA assumption method, but if those numbers don’t get you excited I don’t know what will!
Let’s go over some basics to help you better understand what the loan structure is and who can qualify for it!
Definition of VA loan assumption
Assumable VA loans are mortgage loans that are guaranteed by the U.S. Department of
Veterans Affairs (VA) and can be transferred to another qualified borrower. VA loan assumptions allow homebuyers to take over the existing loan of a seller, without having to go through the process of fully applying for and qualifying for their own interest rate with a lender they have shopped for on their own.
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 current lender must approve the transfer, and the new borrower must meet certain eligibility requirements with the lender that is currently holding the loan.
Benefits of assuming a VA loan
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 previous, 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.
Who is eligible to assume a VA loan?
Eligibility for an assumable VA loan actually has to be agreed upon by both parties, the seller and the buyer. When a seller agrees to sell to a buyer that wants to assume the seller’s loan there are some eligibility requirements that have to be met and even agreed upon.
First, the parties need to understand if the VA entitlement will be moved to the buyer. In this case the buyer must be a qualifying military associated buyer. If the buyer has VA eligibility in their own right they can have their Certificate of Eligibility (COE) pulled and the eligibility can be then tied to them. If the buyer does not have VA eligibility then the seller will have to agree to keep their own eligibility tied to the new buyer. In many cases the seller will not want to take the risk of their eligibility being tied up with someone else.
Once the buyer and seller have the VA eligibility worked out they will need to speak about the loan terms and how the difference will be paid if there is a difference from the price they have worked out to what is left on the loan. In most cases this will be a cash payment from buyer to seller but in some cases creative lending can help make up the difference of the financed vs contract price.
An example of this would be $400K contract price with a $300K loan left. The buyer must figure out how to get the seller $100K. Once that piece is taken care of the new buyer will go to the lender who currently holds the loan and go through the process to qualify for that lender’s pricing.
It is important to understand as a buyer you are qualifying to purchase with the current lender, not going out and seeking your own lender.
Active duty military members
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. The active duty member in many cases buying prior to arrival will need to show that they have orders to the local area and are planning on making the home their primary residence.
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.
Spouses of deceased veterans
When the VA entitlement is tied to the homeowner spouse who passes away the loan can continue to hold the VA benefits that would be automatically transferred to the living spouse. There will be some paperwork that will need to be done in some cases depending on life changes the living spouse goes through. The spouse assuming the loan also gives them the ability to sell the house and in many different scenarios they can go back to the VA and request the eligibility be reinstated if they are approved to use it. This can help the spouse purchase a home in the future using VA home loan benefits.
Borrowers with sufficient income and credit score
Borrowers must have sufficient income and credit scores to qualify with the lender which currently holds the loan in the case of a VA assumption. With the assumption you are not shopping for your own lender, you are simply meeting the requirements of the current lender to “take over” the current loan and all of its terms and conditions.
Can a non-Veteran assume a VA loan?
One of the wonderful things about an assumable loan is that you can take it over even if you have no military affiliation or VA eligibility. In some cases where I have seen this become very beneficial is when a qualified veteran has purchased a home and wants to let their family member purchase it. This can be a great way to live in the house and meet the requirements set forth by the VA but then sell it and if you do not need your eligibility anymore you can transfer it.
Assuming VA loan after death
In most cases depending on the structuring of the life after death plans the next-of-kin can inherit the loan. In some cases the next-of-kin can get with the current lender and find out details about what it will take to let someone else assume the loan. Also, a next-of-kin communicating with the VA will be a vital step if there is a thought that someone may want to assume the current loan without their own eligibility. If the loan is not paid on the property, the property can go into foreclosure.
Assuming VA loan after divorce
Much like a regular VA assumption in the case where the loan is being assumed by a spouse without VA eligibility if the spouse with the eligibility agrees to leave their entitlement with their now ex-spouse the transaction can happen and the non military affiliated owner can hold the military affiliated owner’s VA eligibility for the duration of the loan pay off. At this time the owner who wants to keep the property can assume the financial responsibility and have the second owner taken off.
Can a VA loan be assumed by a child
As long as the child can qualify for the loan in its current state with the current lender a child can take over the loan with the VA eligibility tied to their parent. If the child has their own form of VA entitlement the eligibility can be moved to the child.
In some cases the loan can be inherited by the child.
How many times can a VA mortgage loan be assumed?
The amount of times a loan can be assumed should be part of the preliminary look with the lender that is currently holding the loan. The rules for the loan and how it was structured upon the last closing will need to be evaluated. In some cases the eligibility will be tied to a previous owner and that owner would have to release the eligibility to the next buyers and this can sometimes cause an issue.
The most important thing a buyer can do is sit down with the lending company while they are assuming the loan and go over all of the terms and conditions for the loan and if it will be assumable by the next client and if so how that can happen. Knowledge will be power in this situation! Education is key upfront because once those documents are signed they are the new set of rules!
ADPI Pro Tips
- Once the buyer and the owner of the home have come to an agreement make sure to talk to the LENDER that currently holds the loan. Many are mistaken that the realtor is the communication piece to this. That is not the case! In many cases the realtor has no ability to even speak to the lender about the loan. If you are a buyer or a seller you need to sit down with the actual lender and discuss what is next. The realtor’s role is to walk you through the transaction of buying and selling the house and making sure inspections and due diligence are completed. The lender’s role is to get you qualified and educate you on the terms of the loan.
This blog was written in collaboration with our absolutely amazing DoD SkillBridge employee: Joe