06 May What is a VA Loan Assumption?
If you are a Veteran or a service member, you must be aware of the well-known benefits VA home loans come with. You can qualify for the loan without making any downpayment or paying for Private Mortgage Insurance (PMI). Moreover, these loans come with lower interest rates and lenient credit requirements.
However, something you might not be aware of is that VA loans are assumable. This means that if you cannot afford the monthly installments, you can transfer your loan and liability associated with it to a person who can meet the financial requirements for qualifying for a VA mortgage.
Read on to find out how to use VA home loans and what factors you need to consider while assuming it.
What is VA Loan Assumption?
A VA loan assumption can be defined as a transfer of mortgage liabilities from the borrower to someone who can meet the financial requirements of the lenders. So, rather than selling your property, you simply transfer your mortgages, interest rates and monthly mortgage payments to someone who is eligible to assume a VA loan.
Another interesting fact you can consider is that the person who assumes the loan shouldn’t necessarily be a service member or a Veteran. The person is required to only meet the financial requirements and not military requirements.
To assume the loan, you must meet the following three conditions-
- You are able to meet the financial requirements of the lender.
- You agree to assume all obligations related to the mortgage.
- You are willing to pay 0.5% of the loan balance as funding fees.
How to Assume a VA Loan?
Factually speaking, VA home loans are freely assumable. This means that a veteran and even a non-Veteran can freely assume a VA mortgage, given they meet the financial requirements of both the VA and lender.
Generally, there are two ways to assume a VA loan. First, the new buyer is a Veteran or a service member who is willing to substitute their eligibility with the eligibility of the seller.
The second way to assume a VA loan is to find a non-Veteran who is able to meet the financial requirements of the lender. This is the safest way to assume a mortgage as you would be pretty sure that the new owner can afford the monthly installments.
Moreover, the lender’s participation is mandatory for assuming the loans that were borrowed after 1988. If the lender has automatic authority, you would not need to get approval from the VA. However, if the lender does not have an automatic authority, they will first send your application to the VA for it to get approved.
Who Can Assume a VA Loan?
As stated above, a VA loan can be assumed either by a Veteran who is willing to substitute their eligibility for the loan or by a non-Veteran who can meet the financial requirements of the lender.
Here’s how you can assume a VA loan.
Assuming a VA Loan as a Veteran
If the person assuming your loan is a Veteran, you can ask them to formally substitute their eligibility with yours to move forward with the assumption process. In this case, the new owner would not be required to meet financial requirements. However, they must have a minimum credit score of 620 and an appropriate debt-to-income ratio.
Assuming a VA loan as a non-Veteran
To qualify for VA loan assumption as a non-Veteran, you must pass the financial requirements of the lender and be willing to take over all the liabilities associated with the mortgage.
Assuming a VA loan as a spouse
If the spouse is a non-Veteran, they would be required to meet the financial requirements to ensure that they would be able to afford the monthly installments. However, if the spouse is a Veteran, they can apply for the loan by qualifying for the COE and meeting the lender’s requirements.
VA Loan Assumption Requirements
One of the noteworthy benefits of assuming a VA loan is that even a non-Veteran can assume the loan.
Here are the main requirements you must meet to assume the loan-
To qualify for a VA loan assumption, the seller must be making monthly installments on time. Another thing you might want to consider as a seller is the restoration of entitlement.
What is entitlement?
VA home loans are guaranteed by the US Department of Veterans Affairs. Meaning if you default while paying back the loan, the VA will pay a certain amount to the lender to compensate their loss. This certain amount is either $36,000 or 25% of the loan amount.
This amount is known as VA loan entitlement. The entitlement is stated on the VA Certificate of Eligibility (COE) and is used when you borrow the loan.
Once the entitlement comes to zero, you are no longer eligible for VA loans and, therefore, its benefits.
However, if your loan is assumed by a qualifying Veteran, you can ask the VA for full restoration of entitlement.
To qualify for VA loan assumption as a buyer, you must be willing to adhere to the financial requirements and liabilities associated with the loan.
In addition to taking over the mortgage obligations, you or the seller are willing to pay 0.5% funding fees to the VA. Moreover, the processing fees must also be paid in advance.
Pros and Cons of a VA Assumption Loan
Here are some of the reasons you should go for a VA loan assumption:
Pros of VA Loan Assumption
- During VA loan assumption, you don’t need to apply for a VA loan appraisal or pay the fees associated with it. Moreover, the funding fee of the VA loan assumption is comparatively lower than applying for a new loan.
- You can claim the exciting benefits of a VA loan, like lower interest rates, even though you are a non-Veteran.
- You can have your VA entitlement restored and use VA home loan benefits again.
While VA loan assumption comes with a number f benefits, it surely does come downsides as well. Here are some of the cons of assuming a VA loan:
Cons of VA Loan Assumption
- You can assume a loan only for a primary residence.
- In case your seller is a non-Veteran, you will not be able to restore your entitlement.
- Most lenders do not have automated authority. This means that your application would be first sent to the VA, which can be quite time-consuming.
- Your credit score might be affected if you did not opt for the VA Release of Liability and the new seller failed to make the payments on time.
VA Release of Liability for Seller
Frankly speaking, assuming a VA loan is one of the best ways to qualify for lower monthly payments and even lower interest rates. Moreover, the guidelines are pretty lenient.
So, what’s the catch?
Not assuming the VA loan in the right way can cause a considerable dent in your credit score. While transferring your loan to a new buyer, you must ask the lender for the VA Release of Liability form.
The release of liability form is a legal document that states that you no longer have nothing to do with the down and would not be associated with the loan in any way, even if the new buyer isn’t making the payments on time.
The document is quite important as, in its absence, your credit score could be affected if the new buyer defaulted to pay back the loan.
Is A VA Loan Assumption Right For Me?
If we look through the seller’s perspective, especially a non-Veteran, qualifying for a VA loan assumption can be quite advantageous as you could claim the many benefits of VA loans like lower interest rates and flexible guidelines.
Moreover, for a service member with PCS, giving over the mortgage to another qualifying applicant can also be beneficial as they can be free of their obligations and opt for the full restoration of entitlement with the VA.
However, it is recommended to ask your lender for the release of the liability form before moving forward with the assumption process.