Assumable VA Loans: What They Are and How You Can Benefit
by Becca Stewart - November 29th, 2022
With interest rates rising and housing prices increasing, many military families aren’t sure they can afford homeownership. But one often-overlooked loan program could be the answer. Here, we examine assumable VA loans: what they are, who can qualify, and the benefits for both buyers and sellers.
What is an assumable loan?
An assumable mortgage is a loan in which the buyer agrees to take over the existing mortgage from the seller. With an assumable mortgage, the buyer does not need to apply for a new mortgage. Instead, the remaining balance, existing interest rate, repayment period, and other loan terms stay the same.
The buyer will assume responsibility for the debt, taking on any liabilities associated with the mortgage.
Are all mortgages assumable?
No, not all mortgages are assumable. Conventional mortgages are not transferable (except in limited instances). Only government-backed mortgages are assumable, including FHA and VA loans.
VA loans originated on or before March 1, 1988, are considered “freely assumable,” meaning the buyer can assume the loan without approval from the original lender.
VA loans that closed after March 1, 1988, require authorization from the lender, the VA, or both. Mortgage lenders who are knowledgeable in VA loan programs can provide more detailed approval information.
Assumable mortgages versus sales price
Assumable VA loans allow the buyer to assume responsibility for the existing VA loan balance. However, while an assumable mortgage takes on the remaining balance of the original loan, it does not account for an increase in equity that can increase the sales price.
If the home has increased in value, thus driving the sales price to a higher amount than the existing loan balance, the buyer must make up the difference between the existing mortgage balance and the home’s sales price, either in cash or with another loan.
Pros and cons of assumable VA loans
Assumable loans aren’t a well-known option. But they can be an attractive alternative for both buyers and sellers. While there are advantages, there are some drawbacks to this option as well.
Assumable VA loans can appeal to buyers who would otherwise be priced out of the housing market. Assuming a mortgage can mean lower interest rates for the buyers, saving them tens of thousands over the life of the loan. In this current housing market, with interest rates soaring, buyers could buy a home via loan assumption and have a significantly lower interest rate.
Additionally, sellers might find that offering an assumable loan gives them a considerable advantage. Buyers are drawn to lower interest rates and a more straightforward homebuying process. Sellers who are having trouble selling their homes might consider offering their assumable VA loan as an option.
In many cases, assumable VA loans do not require an appraisal, which could save the buyers hundreds of dollars upfront.
Perhaps the biggest disadvantage for military sellers is a potential loss of VA entitlements. While the buyer does not need to be associated with the military to assume the VA loan, civilian buyers represent a challenge. If a civilian buyer assumes a VA loan, the seller’s VA entitlement remains attached to that property until the loan is paid in full. That is, the seller will not be able to use a VA loan on another property.
VA loan assumption may only be used if the buyer intends to use the home as a primary residence. Dwellings acquired with an assumed VA loan cannot be purchased as investment properties or vacation homes.
Qualifications to assume a VA loan
The original VA loan borrower must meet specific criteria to qualify. Read more about what buyers and agents need to know about the VA loan process here.
However, borrowers do not need to meet military service requirements to assume a VA loan. Civilians can assume VA home loans as long as they meet minimum income and credit requirements.
Per the Department of Veteran’s Affairs, borrowers must meet the following requirements before they can assume a VA home loan:
Agree to take over all the liabilities associated with the current VA mortgage
Must have at least 12 months of on-time mortgage or loan payments
Agree to pay 0.5% of the loan balance as the funding fee
Meet all the income and credit requirements of the lender
Show adequate residual income
Have a debt-to-income ratio less than 41%
Some veteran and survivor borrowers can request to have the 0.5% funding fee waived. Check with a reputable lender for more information.
Release of liability and substitution of entitlement with VA assumable loans
As mentioned above, sellers must acquire a release of liability from the buyer assuming the VA loan.
Without this release, the seller’s credit could be negatively impacted should the new buyer default on the loan payment. It’s imperative to get this release of liability when transferring a VA loan.
If the buyer assuming the loan is eligible for VA benefits, the seller will also need a formal substitution of entitlement. This document will transfer the buyer’s VA entitlements to the loan, therefore reinstating all VA entitlements to the seller.
Sellers who plan to use VA entitlements to purchase another property must complete this substitution process. Without it, your VA entitlement will not be reinstated, which could impact your ability to get a VA loan on another property.
Learn more about assumable VA loans
Assumable VA loans can be a great option for both military sellers and home buyers. However, they’re not right for everyone. Read more about assumable VA loans on the Department of Veteran’s Affairs website.
Before choosing to sell or buy a home via an assumable VA loan, do your research. Whether you’re a home seller with a VA loan or a buyer looking for a lower interest rate, start by contacting a reputable lender experienced with VA loans and assumable VA loans.
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