VA Loan Assumption

VA loans are a great way for veterans and active-duty service members to achieve homeownership on favorable terms and without a down payment.

VA loan beneficiaries can also transfer their VA loan to a homebuyer when they decide to sell their home. The homebuyer assumes responsibility for the loan until it’s been paid off and can benefit from the favorable terms of this type of home financing, even if they are not actually veterans or active-duty service members themselves. This is called VA loan assumption, and it helps both current and future homeowners make homeownership more accessible. If you are wondering, “Can VA loans be assumed?”, then the answer is yes. This option makes the VA assumption an attractive alternative for buyers and sellers alike.

The following overview of VA loan assumption explains what it means and how prospective home sellers and buyers can take advantage of this possibility.

What Is VA Loan Assumption?

VA loan assumption is a process that allows a qualified buyer to take over the existing VA loan from the current homeowner. This means the buyer takes responsibility for the remaining mortgage balance and continues to make payments under the original loan terms.

Can anyone assume a VA loan? Unlike conventional loans, VA loans are assumable without the new buyer needing to be a veteran or service member.

How VA Loan Assumption Works

With the right planning, assuming a VA loan is not complicated, although it requires some careful consideration.

Find a buyer who wants to assume the VA loan

It begins when a potential buyer expresses interest in taking over the seller’s VA loan. The first step is for both parties to agree on the sale terms, including the assumption of the existing VA loan and any additional financing that might be necessary.

Buyer applies for loan assumption

Once an agreement is reached, the buyer must apply for loan assumption through the current lender. This includes a thorough credit and income evaluation, similar to applying for a new mortgage.

The lender will review the buyer’s credit history, debt-to-income ratio, and employment status to ensure they meet the necessary financial criteria. Most VA loan lenders prefer a financial profile similar to that of a current homeowner.

Approval from the Department of Veterans Affairs

If the lender approves the assumption, the next step is to obtain approval from the Department of Veterans Affairs. The VA must agree to release the original borrower from liability on the loan. This is an important step because, without this release, the original veteran borrower would remain responsible for the loan even after selling the property.

Closing the transaction

After the VA approval, the transaction moves to closing. At this stage, the buyer pays any required funding fees, closing costs, and the difference between the sale price and the assumed loan amount (if applicable). The title is then transferred to the new owner, thus completing the assumption process.

Requirements for Assuming a VA Loan

When a buyer decides to assume a VA loan, they must meet specific requirements set by both the lender and the VA.

Creditworthiness

The buyer must demonstrate creditworthiness. This means having a credit score of at least 620, although some lenders may require higher scores. The buyer’s debt-to-income ratio is also important: it should be 41% or lower, though this can vary based on the lender’s policies.

Income

The buyer must show sufficient, stable income to manage the mortgage payments along with their other financial obligations. Lenders want to see at least two years of steady employment or consistent income from self-employment.

Primary residence

While the buyer doesn’t need to be a veteran to assume a VA loan, they must intend to occupy the property as their primary residence for a certain period. Investment properties are not eligible for VA loan assumption.

Closing costs

The buyer must be able to cover any closing costs associated with the assumption process. These may include a funding fee (usually 0.5% of the loan balance for non-veterans), title insurance, and other standard closing costs.

Extra funding

Lastly, if the home’s purchase price exceeds the remaining balance on the VA loan, the buyer must be able to pay the difference, either out of pocket or through additional financing. This additional financing would need to be approved separately and may have its own set of requirements.

Benefits of VA Loan Assumption

The primary advantage for buyers is that they may benefit from lower interest rates, especially if current market rates are higher. They also save money from lower closing costs compared to a new loan.

In most cases, no down payment is required, and the buyer doesn’t need VA eligibility to assume the loan.

Sellers also stand to gain from VA loan assumption. They can tap into an expanded pool of potential buyers, particularly if they are selling in a high-interest-rate environment. With more potential buyers, the sale will go faster.

Drawbacks and Considerations of VA Loan Assumption

There are many reasons why VA loan assumption can be a good financial decision, but prospective homebuyers and sellers should also consider a few drawbacks:

• VA entitlement: The seller’s VA entitlement remains tied to the property until the loan is paid off, which could affect their ability to use their benefit for another home purchase.
• Funding fee: Buyers may need to pay a funding fee, which adds to the overall cost of the transaction.
• Not all VA loans are assumable, depending on when they were originated.
• Additional funding: The remaining loan balance may not cover the full purchase price, which could require additional financing from the buyer to complete the transaction.

VA Loan Assumption

VA loan assumption is an often-overlooked option when it comes to the types of mortgages available to prospective homebuyers.

It’s a great opportunity to transfer a potentially favorable loan to a new owner, which can be particularly attractive in a rising interest rate environment like the current one. Both parties should understand the process, requirements, and potential implications before proceeding with a VA loan assumption.

If you are interested in VA loan assumption, our professional Loan Officers at Society Mortgage can help you assess how this mortgage type can help you sell your property or buy your first home. As experts at VA loans, we will be happy to guide you through the process until you have either sold or bought your home!