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With no down payment required and no mortgage insurance, the VA home loan is one of the best mortgage programs available. The catch, however, is that VA loans are available only for military service members, veterans, and eligible surviving spouses.
Fortunately, a “loophole” exists for non-veteran homebuyers – the VA loan assumption. It allows buyers to take over the existing VA loan, bypassing most of the hassle and expenses that typically come with securing a new loan.
VA loan assumptions offer benefits to veteran homebuyers and sellers and non-veterans as well. But there are risks. Here’s what to know as a buyer or seller.
What is an Assumable VA loan?
If the mortgage on the home is a VA home loan that closed after March 1, 1988, it is an assumable VA loan.
A VA loan assumption is when a mortgage borrower takes over or “assumes” an existing mortgage, including the existing loan’s balance, interest rate, and monthly payments. This arrangement can be a great advantage for both buyers and sellers.
Three Things Buyers Should Know About VA Assumptions
As a home buyer, here’s what you need to know about VA loan assumptions.
1. Who Can Assume a VA loan? (Hint: You Don’t Have to Be a Veteran)
Homebuyers may be eligible to assume a VA loan even if they aren’t an active duty service member, veteran, or surviving spouse.
Note, however, that it could be extremely difficult to find a seller willing to let non-veterans assume their loan. Not only do they lose their ability to use a VA loan again, but they are on the hook if the non-veteran defaults on the loan. Expect to find a willing veteran typically only in distressed sale situations.
For an assumable loan to flow smoothly from one homeowner to the next, the new mortgage borrower must meet certain qualifying criteria. Guidelines vary from lender to lender, but the requirements are typically as follows:
Credit. While the VA itself doesn’t have a minimum credit score requirement, most lenders require a minimum score of 620. Some lenders will go as low as 580.
Employment and income. New mortgage borrowers must prove employment and income. Most lenders require your total housing payment and debt payments to be no more than 41% of your gross income.
Occupancy. The buyer must intend to occupy the home as their primary residence.
Funding fee. The new buyer is required to pay a funding fee of 0.5% of the loan amount, which is less than a veteran pays when buying with a new VA loan.
It’s important to note that lenders are not required to issue a VA loan assumption. As a buyer, your first step is to make sure it’s possible.
And, while VA loans don’t require a down payment, buyers will have to have cash on hand (or take out another loan) to bridge the difference between what is owed on the mortgage and the current sales price.
Example:
- Sale price: $400,000
- Existing VA loan: $300,000
- To purchase the property: Assume the VA loan and pay the seller $100,000 via cash or an additional loan
2. Benefits Of Assuming A VA Loan
Designed as a benefit for veterans, VA home loans offer significant advantages over other types of mortgages. This makes VA mortgages a powerful bargaining tool for sellers and highly appealing to buyers looking to assume this type of loan.
No PMI
PMI, or Private Mortgage Insurance, is usually required to protect the lender against default for loans with less than 20% of the home’s value. It can be hundreds of dollars per month. VA mortgage loans do not require PMI.
Lower Mortgage Rates
In general, VA mortgages offer lower interest rates compared to other loan options. In today’s market, where mortgage rates have risen sharply, there’s a good chance that the assumable loan rate could be significantly lower than today’s mortgage rates. You may be able to save a substantial amount, even when factoring in the VA funding fee of 0.5%.
Lower Costs
VA loan assumptions feature fewer costs and fees than traditional purchase loans. Appraisals aren’t required for a VA loan assumption, saving you time and money.
3. Finding a VA Assumable Mortgage
The Department of Veterans Affairs does not directly offer a list of assumable VA loans. Instead, finding them requires a bit of legwork.
Be proactive in your search and clearly communicate with lenders, real estate professionals, and sellers about your goal to assume a VA loan. Here are some ways to start your search:
Lenders and Loan Servicers
Check with banks and mortgage companies that offer VA loans. They may be able to provide lists of assumable VA loans or connect you with homeowners looking to sell through loan assumption. Remember, lender approval is required for the assumption process.
Real Estate Agents
Work with real estate agents who are knowledgeable about VA loans and the assumption process. They often have access to listings or can network to find properties with assumable VA mortgages. Be sure to communicate your interest in assuming a VA loan from the beginning.
VA Loan Specialists
A VA loan specialist can guide and assist in finding assumable VA loans. They have the expertise and networks to help you navigate the process, from identifying potential loans to completing the assumption.
Online Platforms
There are several online real estate platforms and forums dedicated to VA loans and military housing. Sites like Zillow, Realtor.com, and MilitaryByOwner allow you to filter listings by loan type, making it easier to find assumable VA loan opportunities.
Social Media and Networking
Social media groups and real estate forums can be valuable for finding leads on assumable VA loans. Joining groups focused on military relocation, veteran housing, or assumable mortgages can help you connect with sellers and others interested in loan assumptions.
» MORE: See today’s refinance rates
Three Things Veteran Home Sellers Should Know About Letting Someone Assume Their VA Loan
As a seller, offering an assumption has benefits, but some risks, too.
1. Get Top Dollar for the Home
Home sellers with a VA loan on their home can benefit from a VA assumption.
A VA assumable loan can make the property more attractive to buyers, especially during periods of rising interest rates. For example, you could charge a premium on the home if you can offer a 3% VA loan rather than the buyer needing a new 6-7% rate.
2. Find a Veteran Buyer, Get Your VA Loan Entitlement Restored
If the buyer is also a Veteran and qualifies for entitlement substitution, the seller can have their entitlement restored. This means the seller may qualify to use their VA loan benefit again.
3. VA Entitlement Loss: Potential Risk for Sellers with VA Loans
VA loan entitlement is how the VA determines whether a service member or veteran is eligible for a VA loan.
If the new mortgage borrower is eligible for VA loans and has sufficient entitlement, the seller can request to substitute the entitlements. But if the new borrower doesn’t have adequate entitlement to make the substitution, the seller’s entitlement will remain attached to the home until the loan is paid off.
As a seller, confirming whether the borrower has sufficient entitlements for a substitution is vital.
The good news is you may still qualify for another VA loan if the buyer assuming your loan is also an eligible military borrower. When asking for an ownership transfer, you can also request that the VA restores your entitlement so you can reuse your VA loan benefits to buy a new home.
In cases where a non-military borrower is assuming your loan, the VA will not restore your loan entitlement until the home is sold and the loan is paid in full.
You’ll want to ensure your lender releases you from liability on the loan as part of the mortgage assumption process. Otherwise, your credit reports and scores could be negatively affected if the assuming borrower makes late mortgage payments.
Should You Consider a VA Loan Assumption as a Buyer or Seller?
There are many clear benefits to having a VA home loan. By assuming a VA mortgage, you could see significant savings, especially when current interest rates are higher than those of most existing VA loans.
As a seller, before deciding on the VA loan assumption route, be sure to do your research.
If you’re a buyer, start by contacting a reputable lender experienced in VA loan assumptions. With persistence and the right approach, you can unlock the benefits of an assumable VA loan for your homeownership journey.