Are VA Loans Assumable?
VA loans offer an assumable option, but is it worth it for the seller?
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Have you ever wondered if you could transfer a mortgage to another person, provided both parties agree to all the loan terms and conditions? It sounds simple, and surprisingly, it could be a possibility. This process is referred to as assuming a loan. While not all types of mortgages are assumable, VA loans are one type where a borrower does have the option of assuming the loan. It can have enormous benefits for the borrower and possibly the seller, but there can be downsides too.
An assumable mortgage allows a borrower to take over an outstanding mortgage from a seller and VA loans offer the option of assumption.
Jump to insightThe borrower doesn’t have to meet the military requirement for a VA loan, but does have to meet the lender’s borrowing criteria.
Jump to insightIf approved, the borrower takes over the existing loan but must pay a VA funding fee first.
Jump to insightWhat is an assumable VA loan?
An assumable mortgage allows a borrower to take over an existing mortgage while keeping the original terms and conditions of the loan. Taking over a loan as the borrower means you assume all the payments, the interest rate, fees and any other costs associated with the mortgage. Once the seller (the original loan holder) and borrower make the agreement, the seller no longer has an obligation for the mortgage as long as they’re released from any liability.
Not all mortgages are assumable, but VA loans are. The best part is, even if the person taking over the loan isn’t eligible for a VA loan through military service, they can still assume a VA loan based on creditworthiness.
Who can assume a VA loan?
The Department of Veterans Affairs, or VA, backs VA loans, but they’re issued through private lenders. Original VA loans are only available to current military members, veterans or surviving military spouses. In addition to the military requirement, the applicant must meet certain qualifying criteria from the private lender facilitating the loan, which may include income, credit score, employment, down payment or other personal factors.
With a VA loan assumption, the borrower who is assuming the loan does not have to meet the standard military requirements. Anyone can assume a VA loan as long as they meet the creditworthiness criteria from the lender. However, if you do meet the military qualifications, then your eligibility can replace the seller’s eligibility.
Kate Monroe, CEO of VetComm, explained that “the borrower does not need to be a veteran – this is an amazing benefit. Once your loan is assumed, you get to use the VA loan again. You may sell your home to someone who agrees to assume your loan if the loan holder or VA approves the creditworthiness of the purchaser as per the VA.”
» MORE: VA loan limits
How to assume a VA loan
You’ll have a few steps to go through if you’re the borrower trying to assume a VA loan. The first step is determining if you’re eligible for a VA loan based on your own military affiliation, or if you would only qualify based on your creditworthiness.
The lender holding or servicing the loan will have to verify your creditworthiness and eligibility through paperwork and supporting documentation, such as with a W-2, credit score and paystubs. Since you’re dealing with the original loan issuer, you’ll also have to meet its loan criteria, guidelines and processing timelines.
If you’re approved as the new borrower, you’ll have to sign paperwork, pay a VA funding fee and meet any down payment requirements.
The seller will need to obtain a Release of Liability from the lender, so they’re not responsible for mortgage payments if the new borrower defaults on the loan. The seller can get this document from the lender before closing; otherwise, they put themselves at great financial risk.
Pros and cons of assumable VA loans
Assumable VA loans may offer an enormous advantage to the borrower, including the fact that the borrower inherits the interest rate, which is likely less than other lending options since VA loans typically have lower interest rates. “You assume the rate, which, if the loan was acquired in previous years, is a massive advantage for you as a borrower,” Monroe said.
However, the loan assumption must go through the approval process with a lender, which isn’t guaranteed. Additionally, if a borrower is a civilian, the veteran’s VA entitlement stays with the loan until the loan is paid off. Entitlement refers to how much of a loan the VA will guarantee. If the seller’s entitlement is tied to the original loan, then they can’t take advantage of future VA loans until it’s paid off.
As with all loan types, there are potential advantages and disadvantages of assuming a VA loan. Here is the full list of pros and cons to consider.
Pros
- Access to a lower interest rate
- Greater cost savings
- Lower VA funding fee
- No military requirement
Cons
- Approval not guaranteed
- Must meet credit requirements
- Potential lengthy process
- Entitlement may stay with the loan
» MORE: FHA vs. VA loans
FAQ
Are there any fees involved in assuming a VA loan?
Yes, the borrower assuming the VA loan will pay a VA funding fee before assuming the loan, which is a percentage of the overall loan amount. The VA funding fee for an assumable loan is 0.5% of the loan amount.
Does assuming a VA loan affect my VA loan entitlement?
Yes, assuming a VA loan can affect the VA loan entitlement for the seller. This means they can’t receive as much of a loan guarantee from the VA for future VA loans until the current loan is paid in full and may have to put down a down payment on their next VA loan. However, if the borrower assuming the loan also has entitlement (meaning, they meet the military qualification), then the seller and borrower can substitute their entitlements.
Can all types of mortgages be assumed?
No, not all types of mortgages can be assumed. FHA, VA and USDA loans are the most common types of assumable mortgages. No matter what type of loan a borrower assumes, they must meet the qualifying criteria from the lender.
Bottom line
An assumable VA loan may present an attractive option to a borrower for several reasons, including access to lower interest rates, lower loan fees and closing costs. However, as promising as an assumable VA loan sounds, it can present risk to the seller because their VA loan entitlement stays with the loan until it's paid off. While VA loans are one of the assumable mortgage options available, this transaction should suit both the needs of the seller and the borrower before going down this path.
Article sources
- Department of Veterans Affairs, “Rights of VA Loan Borrowers.” Accessed March 4, 2024.
- Department of Veterans Affairs, “Release of Liability.” Accessed March 4, 2024.
- Department of Veterans Affairs, “VA funding fee and loan closing costs.” Accessed March 4, 2024.
- Department of Veterans Affairs, “Chapter 2. Veteran’s Eligibility and Entitlement.” Accessed March 4, 2024.
- Department of Housing and Urban Development, “Chapter 7. Assumptions.” Accessed March 4, 2024.
- United States Department of Agriculture, “Types of Loans Chapter 2: Overview of Section 502.” Accessed March 4, 2024.
