01 Jun Who Can Assume a VA Loan
Veterans Affairs (VA) loans backed by the U.S. Department of Veterans Affairs are popular among military buyers who don’t want to pay a down payment or insurance on their mortgage. Another benefit of VA loans is they can be assumed.
Even if the borrower is not a military service member, veteran, or eligible surviving spouse, a VA loan “assumption” allows them to take over the conditions of an existing mortgage. Both homebuyers and sellers could benefit from this type of transaction.
Now let’s consider how VA loan assumability might affect your home-buying prospects and who can assume a VA loan.
Related Article: Best VA Loan Lenders for Active Military & Veterans 2021
What Is a VA Loan Assumption?
An assumable mortgage loan allows a new home buyer to inherit the seller’s loan when they buy the house without changing the loan conditions. This means that a borrower can assume the terms of an existing VA loan even though they are not eligible for one themselves.
As a result, the home buyer will be responsible for the same mortgage payment as the seller. VA assumable loans can be a big selling point if the seller is locked in a competitive interest rate.
Loans from governments are generally assumable. Conversely, mortgages are not usually assumable. Nevertheless, this feature of the VA loan is beneficial to potential buyers and sellers alike.
NOTE: You’ll need backup financing to pay the gap between the home’s worth and the outstanding mortgage balance if you’re going for an assumable loan. If your financial situation allows, you might be able to obtain a home equity loan or home equity line of credit (HELOC).
Who Can Assume a VA Loan
Veterans, active military members, and surviving spouses can obtain VA loans. However, the VA loan assumption requires that the assuming borrower (veteran or not) is financially qualified for the loan.
If you are a veteran with entitlement, taking out a VA loan may be the most convenient option. You’ll step in and finish the loan that the seller started. You will have to give up the equivalent of the principal balance on the seller’s loan in your entitlement. As a result, your entitlement is related to your residence.
Non-veterans may be eligible to take a VA loan, but the seller has a downside. The seller is required to preserve his right to the property attached to the house. The lender will not allow someone who does not have the right to the loan to assume it.
There would be no guarantee if they did that and the buyer defaulted on the loan. Therefore, the lender would not receive their money back. The VA guarantees 25% of the loan amount with entitlement. This implies the VA will reimburse the lender for 25% of their lost money.
Under the VA loan assumption program, veterans and their spouses may have options. According to VA Loan guidelines, the veteran can ask for release from the VA loan and allow their spouse to accept the mortgage in “certain circumstances.”
It is permissible when “the ex-spouse was jointly liable on the debt with the veteran previous to the divorce.” In other cases, the veteran can be “granted the property, and the ex-spouse may seek a release of liability,” according to VA loan guidelines.
VA Loan Assumption Qualifications
Active service personnel and veterans are not the only ones who can assume a VA loan. Anyone deemed qualified by the lender to take on the loan’s payment amount is eligible to do so.
- Home sellers must also meet specific criteria to be eligible for a VA loan assumption. By the time the transaction takes place, you should be current on your mortgage payments.
- When a non-military borrower assumes your loan, the VA will not reinstate your loan entitlement until the house is sold and the loan is fully paid off.
- The good news is that if the buyer who assumes your loan is also a qualified military borrower, you may still be eligible for another VA loan.
- The buyer must demonstrate that they intend to use the property as their principal residence (if you want to substitute your entitlement).
A significant advantage of taking out a VA loan is that you do not have to be a military member to take over a homeowner’s mortgage payments. If you are wondering can a family member assume a VA loan, the answer is yes! However, you will have to prove your credibility as a possible borrower.
You must meet the following requirements to qualify for a VA loan:
- Score of 620
- Debt-to-income (DTI) ratio of 41%
- A sufficient amount of residual income to support your family’s size
The VA requires you to pay 0.5 percent of the loan amount within 15 days of taking out the loan. There’s also a credit report fee and a processing fee, which might total $300 or more.
If you’re taking on a VA house loan and you’re a qualified military borrower or surviving spouse, you may be able to use your own VA loan entitlement instead of the seller.
How to Assume a VA Loan
Here are the steps you’ll need to complete as a borrower looking to take on a VA loan.
- To begin, see if you qualify for a VA loan based on your military service. You can substitute the seller’s eligibility with your VA loan eligibility as a qualified veteran.
- If you aren’t an eligible veteran, you must qualify for the loan based on your financial circumstances. The lender will ask for documentation that validates your income, debts, and credibility in either situation.
- The lender will determine your ability to assume the VA loan in question. Depending on how quickly the lender responds, you may learn about your eligibility in hours or weeks.
- Once approved, you must sign off on the assumption and pay the funding charge and any required down payment.
Also Read: Steps to Buying a Home With a VA Loan
Benefits of Assuming a VA Loan
- Applying for a new loan is unnecessary if the VA loan is assumable. The buyer will save thousands of dollars by avoiding closing charges and appraisal fees.
- A VA loan assumption fee is charged at a significant discount over other fees. An average VA loan user pays 2.15% for the VA funding fee, a second-time VA loan user pays even more, but the VA only charges 0.5% for the assumption, which is much less than the other fees.
- You may be able to receive a low mortgage rate, especially if rates are higher now compared to when you took out the loan.
- Veteran buyers’ VA loans pose less risk to the seller since they receive all of their VA loan benefits back.
Why You Wouldn’t Want to Assume a VA Loan?
If you assume a mortgage, you may face certain downsides, and it will depend on your circumstances.
- Substantial cash-down payment is required. The main disadvantage of taking out a mortgage is that it may require more cash upfront than if a buyer is applying for a mortgage on their own.
- Payments for Mortgage Insurance. If the seller placed less than a 20% down payment on a conventional loan and sells before achieving 20% equity, the buyer will be responsible for the monthly private mortgage insurance payment (PMI).
Things to Know About Assuming a VA Loan
Nowadays, you can obtain a VA loan in two different ways.
1. An eligible veteran “substitutes” him or herself for the seller’s VA eligibility upon buying the property
2. The new homebuyer meets VA mortgage payment requirements. This is the safest approach for the seller because it permits their debt to be assumed, knowing that the new buyer will be accountable for the loan and the seller will no longer be.
3. A spouse assuming a VA loan after death may look a little different, depending if the spouse is on the loan.
A loan assumption requires approval from the lender or the VA.
Related Article: VA Loan Limits by County
The Bottom Line
VA loans are a wonderful option for borrowers who can assume a VA loan and sellers alike; however, taking out the loan in the wrong way can negatively impact your credit score and eligibility for a VA loan.
Ensure that your future borrowing alternatives are protected by doing the following:
- Before closing, homebuyers must get a “release of liability.”
- In addition, you must request that the borrower use their own VA loan benefits rather than yours. This may allow you to reclaim your entitlement and use the “no downpayment option” in the future.
Lower interest rates may be an enticing prospect for some. Other home buyers and sellers, on the other hand, could find that a different house loan is better suited to their circumstances.
Before you jump in, consider the benefits and drawbacks of this approach.