Are VA Loans Assumable?

If you’re looking to buy or sell a home, consider the unique opportunity that assumable VA loans provide. Not only do these loans allow the buyer to take over the seller’s existing mortgage, but they also feature additional benefits because they’re backed by the U.S. Department of Veterans Affairs (VA).

Assuming a VA loan is possible even if the buyer isn’t a military service member, veteran or eligible surviving spouse. Both homebuyers and sellers can benefit from an assumable VA loan, since it creates a huge incentive: If the seller has a great interest rate, the buyer gets to keep it once they purchase the home.

What is an assumable loan?

Loan assumption is a lending process through which one person takes over another’s existing mortgage. The borrower assumes the loan’s interest rate, outstanding balance, repayment term and other features. An assumable VA loan is a loan that allows for this special process.

An assumable loan differs from the normal home loan process, which usually involves a homebuyer applying for and taking out a new mortgage to finance their purchase.

You may need a down payment to assume a mortgage

If you buy a home using an assumable loan, you’re responsible for the difference between the home’s value and the outstanding mortgage balance. If you can cover this difference in cash, you’re golden — but, if not, you may need backup financing. Your options may include a home equity loan or a home equity line of credit (HELOC).

Is an assumable VA loan right for me?

Loan assumption can be a good financial move, but:

• As a potential buyer, it’s smart to consult a VA-approved lender and familiarize yourself with VA loan requirements and fees before deciding whether assuming a VA home loan is your best option.
• If you currently have a VA loan and want to sell the home it financed, it’s crucial to first understand your rights and how this transaction can affect your VA loan entitlement.

What VA loan assumption means for buyers

You don’t have to be a military borrower to assume a current VA homeowner’s mortgage — and you’ll still get to enjoy the favorable interest rate and other loan terms VA loans come with. You will, however, have to demonstrate your creditworthiness as a potential borrower and make it over these hurdles:

VA loan requirements

In order to assume a VA loan, you should expect to meet the following general VA loan requirements:

• Minimum credit score: 620→ While the VA itself doesn’t set a minimum credit score requirement, lenders do. The exact bottom limit will vary from lender to lender, but 620 is common.
• Maximum debt-to-income (DTI) ratio: 41%→ Your DTI ratio represents the amount of debt you pay each month compared to how much money you earn.→ You may be approved with a DTI over 41% if you can document a large amount of tax-free income or residual income.
• Residual income: Enough for your family size, according to VA income requirements.→ Residual income is the amount of money your family has left over each month after paying for housing and existing debts.

The VA funding fee

Within 15 days of assuming the loan, you’re required to pay a VA funding fee directly to the VA that’s equal to 0.5% of the loan amount.

You may qualify for a VA funding fee exemption if:

• You’re receiving compensation for a disability that resulted from your military service
• You’re entitled to receive disability compensation but instead receive active-duty or retirement pay
• You’ve received a Purple Heart and are still on active duty
• You’re a surviving spouse of a veteran who died in service or from a service-related disability

Processing fees

The VA allows the lender to charge processing fees of up to $300 plus the cost of a credit report, but this may be capped even lower depending on the laws in your state.

What VA loan assumption means for sellers

Selling your home using loan assumption can offer you an advantage, especially if you’re selling in a buyer’s market or trying to sell your house fast. However, you’ll need to meet certain requirements to qualify and familiarize yourself with the implications for your VA loan entitlement.

VA loan requirements for sellers

• Credit profile. You must be current on mortgage payments by the time the transaction takes place.
• Closing costs and fees. With a VA loan, the question of who pays closing costs can be confusing because the VA prohibits buyers from paying certain fees that they often pay with other loan types, like conventional loans. Any fees the buyer can’t pay, the seller will likely need to cover. These may include:→ Attorney’s fees. Lenders can’t charge buyers for attorney’s fees, but one thing to note is that this doesn’t include reasonable title services.→ Brokerage fees. If there are any real estate agent or broker fees, the seller will have to pay them because a buyer isn’t permitted to.

How selling through assumption impacts your VA loan entitlement

• Selling to a nonmilitary buyer will affect your loan entitlement. In cases where a nonmilitary borrower is assuming your loan, the VA won’t restore your loan entitlement until the home is sold and the loan is paid in full.
• Selling to a military buyer may affect your loan entitlement. If the buyer assuming your loan is also an eligible military borrower, their entitlement can substitute for whatever portion of your entitlement was involved in the loan. But make sure that:
  • The buyer is willing to substitute their entitlement
  • The buyer has sufficient entitlement for the transaction
  • You request that the VA restore your entitlement so you can reuse your VA loan benefits to buy a new home
• Selling doesn’t automatically relieve you of liability — you need to request it. You’ll want to ensure that your lender releases you from liability on the loan as part of the mortgage assumption process. Otherwise, your credit reports and scores will be negatively affected if the assuming borrower makes late mortgage payments.

Pros and cons of VA loan assumption

Pros

 Flexible. You don’t have to be an active-duty military service member, veteran or surviving spouse to qualify for VA loan assumption.

 Low fees and costs. You’ll have a lower VA funding fee and fewer closing costs than if you were applying for a new loan.

 Low rates. You could get a low mortgage rate, especially if rates are higher than they were on the loan’s origination date.

 No prepayment fee. You won’t be charged a fee for paying off the loan early since VA regulations prevent lenders from charging prepayment penalties on VA loans.

Cons

 Qualification. You’ll still need to meet general credit and income eligibility requirements.

 Down payment. You may need a down payment to cover the gap between the home price and loan balance.

 Effects on VA entitlement. The seller is locked out of getting another VA loan until the assumed loan is paid off — unless the buyer is able to sub in their own VA entitlement.