How to Assume a VA Loan

How to Assume a VA Loan

How to Assume a VA Loan

Assuming a VA loan is an appealing advantage of VA loans. This process lets you take over someone else’s mortgage, along with their lower interest rate and monthly payment. With the higher mortgage rates today, being able to assume a VA loan can be a valuable opportunity for potential buyers. In this article, we will look at what a VA loan assumption is, how the process works, and who is eligible to assume a VA loan.

What is a VA Loan Assumption?

A VA loan assumption allows a buyer to take over a Veteran’s active mortgage, including their low interest rate and monthly payment. This can be a huge opportunity, especially with today’s higher mortgage rates. You don’t need to be a Veteran to take over a VA loan, but there are risks for Veteran homeowners who allow civilians to assume their mortgage.

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Benefits of a VA Loan Assumption

  1. Major Monthly Savings: Almost 90% of VA homeowners enjoy a mortgage rate of less than 5%.. For example, on a $400,000 loan with a 7% interest rate, the monthly principal and interest payment is about $2,660. With a 3% rate, that payment drops to $1,686, resulting in nearly a thousand-dollar difference in monthly housing costs.
  2. Low Costs & Fees: VA loan assumptions come with fewer costs and fees compared to traditional purchase loans. The person assuming the loan pays a funding fee of 0.5% of the loan balance, which goes directly to the VA. Veterans who are typically exempt from the VA Funding Fee are also exempt from this assumption fee. Loan assumers may want to pay for an appraisal, but it is not required when assuming a loan.

Challenges of a VA Loan Assumption

  1. Cashing Out Homeowner Equity: Would-be buyers need to pay the homeowner for the equity they’ve built in the property. For example, if the VA homeowner has $350,000 remaining on their loan and they’re selling their home for $450,000, the person assuming the loan would need to pay the homeowner $100,000 at closing. This cost is usually covered in cash, but secondary financing might be possible.
  2. Impacts on VA Loan Entitlement: For VA homeowners, allowing an assumption can affect their VA loan entitlement. If the person assuming the loan is a Veteran with sufficient VA loan entitlement, they can substitute their entitlement for the homeowner’s. Otherwise, the entitlement used to buy the home stays tied up until the loan is completely paid off. This can limit the homeowner’s 0% down purchasing power for future use of the VA loan benefit.

How to Find Assumable VA Loans

  1. Work with a Real Estate Agent: Ask a real estate agent to locate homes with assumable VA loans. Agents with access to the multiple listing service (MLS) can make shopping for homes with assumable mortgages easier.
  2. Search Home Listings: Some home sellers advertise their assumable mortgage to help their listing stand out. Searching individual home listings on major real estate search sites can also help you find assumable VA loans.

How to Assume a VA Home Loan

Veterans and civilians who want to assume a VA loan need to find them first. A reliable real estate agent can be helpful, but home listings on popular websites are increasingly highlighting assumability as a key advantage. Generally, a home with a VA or FHA loan is assumable, while conventional mortgages are not.

Guidelines and Requirements:

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  • Acceptable credit score
  • Acceptable debt-to-income ratio (DTI)
  • Sufficient assets
  • Satisfactory credit history
  • Employment verification

If you want to pursue an assumption, you’ll need to work with the lender or servicer that issued the original VA loan. Lending guidelines, processes, and timelines will vary.

Conclusion

VA loan assumptions can make homeownership more affordable for buyers and give VA homeowners a big bargaining chip when marketing their home listing. However, it’s important to consider the benefits and challenges before proceeding with a VA loan assumption. Working with a knowledgeable real estate agent and understanding the requirements can help you navigate the process successfully.

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