Are VA Loans Assumable?
Yes, there are assumable VA loans, and I believe they are going to be one of the greatest benefits of the VA Loan in the coming years—more on that to come!
An assumable loan can be transferred with home ownership. For example, instead of qualifying for a loan for myself I could buy a property and take over their existing mortgage!
What are the Requirements to Assume a VA Loan?
For a VA Mortgage assumption to transpire you must meet the below criteria:
- The existing loan must be current, or any past due amounts must be paid at or before closing day.
- The buyer is assuming all mortgage obligations, including repaying the VA if they default on the loan.
- The original owner—or new owner—must pay a funding fee of 0.5 percent of the remaining loan principal balance. For example, if the remaining mortgage balance is $400,000 at the time of closing, you would need to pay a funding fee of $2,000.
- It is worth noting that the standard funding fee exemptions (10% disability, purple heart, etc.) are still applicable with VA Loan assumptions.
- The buyer must qualify for the existing mortgage based on credit and income guidelines from the VA
- A processing fee must be paid in advance, and include an estimate for the cost of pulling the buyer's credit report.
Who can assume a VA Loan?
BLUF regarding entitlement: When a VA loan is assumed by another eligible veteran, the entitlement typically does not need to be transferred and can simply be exchanged between the buyer and seller.
While the VA loan is only available to service members and veterans, people without VA eligibility are allowed to purchase a home through VA Loan assumption.
There is a clear downside to this for the seller though. You see, a non-veteran can assume a VA home loan as long as the original holder of the loan is willing to transfer their VA loan entitlement. The veteran seller who has transferred their VA loan entitlement to a non-veteran buyer will leave their entitlement—according to the original loan amount—tied up until the original loan is paid off.
For this reason, most VA loan holders don’t let non-veteran buyers assume their loans. However, the favorable terms of the VA loan make it an appealing bargaining chip, and some sellers who hold VA loans will use this to their advantage, particularly if they have no plans for the immediate future to take out another VA home loan.
If the person assuming your loan is a Veteran with sufficient VA loan entitlement, then you can ask them to formally substitute their entitlement for yours on that mortgage. Otherwise, the entitlement you utilized to purchase the home will remain tied up there until the loan is fully repaid.
Failing to get a substitution of entitlement can limit your $0 down purchasing power when it comes time to reuse the VA loan benefit. What's worse is that Veterans would lose that portion of their entitlement entirely if the assumer later defaults on the loan.
Can a civilian assume a VA mortgage?
Yes, a civilian can assume a VA Loan. The downside to this is that the veteran will lose access to that entitlement amount until the loan is paid off completely.
Can a family member assume a VA Loan?
Similarly, a family member can assume a VA Loan according to the same rules as when any other civilian assumes a VA Loan.
What are VA Loan Assumptions?
When prospective borrower wants to buy a house, in most cases, they apply for and take out a new mortgage to finance their purchase. This differs from a loan assumption.
Assuming a loan is a lending process under which a borrower takes over another borrower’s current mortgage.
With that, the home buyer will have the same mortgage payment the home seller had. If the seller had a great interest rate locked in, the assumable nature of the loan can be a big selling point.
When mortgage interest rates rise, there are always homebuyers who are at risk of being priced out of the real estate market. Loan assumption can be a powerful enticement for these buyers as they shop for houses, as it would allow them to pay lower interest rates even as the housing market becomes more expensive.
Most government loans are assumable loans. Most mortgages are not assumable. But this feature of the VA loan can act as a benefit for both buyers and sellers.
How to Find VA loans that are assumable?
If you want to assume a VA loan, you’ll need to find one first. Here are some places to look for a VA loan to assume:
- A real estate agent: Ask your real estate agent to help you find homes with sellers who are willing to allow you to assume their VA loan.
- The multiple listing service: The MLS is a great resource for all shoppers. Talk to a real estate agent who has access to the MLS to find homes with VA assumable loans.
- Print ads: Checking the local ads could help you spot a deal. You might be surprised by what you find in your local paper!
- Specialized websites: Consider looking at websites like TakeList.com or Zumption.com to find sellers willing to undergo the assumption process.
Although it may take some time to find the right home with an assumable loan option, it could be worth the wait.
How to take advantage of assumable VA Loans?
While assuming a VA loan isn’t a very complicated process, there are some requirements you need to be aware of if you are looking to buy a property this way.
What are the VA Requirements for buyers to assume a loan?
- The property must be purchased with the intent of being used as your primary residence.
- No minimum credit score requirement, though 620 appears to be what most lenders are looking for.
- Must have a backend debt-to-income (DTI) ratio of 45% or better. Essentially, you will need to make enough income to support the loan amount.
- Pay the VA funding fee of 0.5%—unless otherwise exempt.
- Make a down payment equal to the difference between the existing loan balance, and the purchase price—unless the seller is carrying a second mortgage as part of your purchase and sale agreement.
Exceptions to VA Approval for Assumptions
According to the VA guidelines, the below situations don’t require VA approval to execute VA loan assumptions:
- In the event of the borrower’s death, the loan was assumed by a relative.
- The transfer/assumption occurred due to legal separation or divorce, and the spouse became the sole owner of the house.
- The assumption did not require the transfer of rights of occupancy, and the owner remained the beneficiary.
- The assumption occurred as a result of a spouse/child becoming a joint owner of the property.
- The assumption required the creation of a subordinate to the lender’s security instrument and did not include the transfer of occupancy rights to the property.
- A security interest in household appliances for purchase money was created in the assumption.
Why VA Loan Assumptions Matter in 2023
Let me paint you a picture quickly…
In 2020, 2021, and early 2022 people locked in 30-year, fixed-rate, VA loans at anywhere between 2.25% and 3.5% interest rates all day long.
Then, property values skyrocketed.
Then, interest rates skyrocketed…like, doubled, tripled, heck…maybe even quadrupled by the time you read this, who knows!
For ease of math, I’m going to compare a $500,000 mortgage at 3%, 6%, and the current 8% interest rates (amortized for 30 years) so you can see how much of an impact this makes on your monthly payment.
3% interest rate: $2,108
6% interest rate: $2,998
8% interest rate: $3,669
As you can see, the increased interest rates will dramatically increase monthly payments going forward.
For this reason, if you can find somebody that is looking to sell their home on a fixed-rate 30-year VA loan locked into a 3.5% interest rate (or lower), it’s a no-brainer to me that you should try to assume their mortgage!
I’m normally not a huge fan of down payments, but in this situation, it makes sense because it will save you a ton of money month over month on your payment.
Also, another great benefit to this is the way amortization tables work. You see, amortization works by placing the lion's share of your interest payments at the beginning of your mortgage. Over time, more and more of your monthly payment will go toward your principal, and less of the payment will go toward interest, but in the beginning, a large portion of your mortgage will go toward interest.
For example, on that same $500,000 mortgage at 3% interest, your first mortgage payment of $2,108 will have $1250 go toward interest, and only $858.02 go toward the principal. Ten years into the loan $950.25 will go toward interest, and $1157.77 will go toward principal, still not incredible per se, but much better.
You’re probably wondering why you should care about my amortization ramblings, don’t worry, here’s the part where I tell you…
It’s because, if you assume a loan in June of 2023 that originated in June of 2020 there are only 27 years left on that loan. You are taking over the mortgage three years into the amortization cycle!
Sticking with our same $500,000 @3% example, that means you would be jumping into the mortgage with your payments being distributed as $911.01 toward principal and $11.97.01 toward interest, or $52.99/month more going straight toward principal payment than if you had bought the house on those same terms with a 30-year note, instead of taking over it three years into the existing note.
You got a badass deal!
Oh, and if home values drop to a point where you can assume a VA loan without having to come out of pocket for a down payment, VA loan assumptions will be the best way to purchase a home in existence as far as I’m concerned!
Pros of Assuming a VA Loan
- A potential buyer isn’t required to be eligible for the VA loan to assume an existing VA loan!
- The funding fee and closing costs are reduced for a loan assumption.
- Possibility to take over a lower interest rate mortgage than you could get in the current economy.
- When a veteran assumes the mortgage sellers will be able to regain their full entitlement.
Cons of Assuming a VA Loan
- The seller’s credit score could be negatively affected as well if the buyer defaults on the loan or makes a late payment before liability is transferred. The lender will hold the initial borrower responsible for payments until there is a release of liability, which could take some time, depending on the lender.
- A seller may have to forfeit their entitlement if the buyer isn’t eligible for the VA loan. In this scenario, they will have to wait until the original loan is paid off to regain their full VA entitlement.
- Sellers will remain liable for the loan until they obtain a release of liability from their lender—before closing on the sale, ensure that your lender will give you a release of liability.
- Buyers may have to make a down payment to cover the gap between the purchase price and the existing mortgage balance.
- Lenders aren’t required to approve the assumption of the loan.
- It can be a lengthier process sometimes.
Frequently Asked Questions (FAQs) about VA Loan Assumptions
Here are some of the Frequently Asked Questions (FAQs) that I see regarding VA Loan Assumptions.
How much of a down payment is required with VA loans that are assumable?
That depends. Technically, the answer is that there is no down payment required to assume a VA loan.
However, if there is a gap between the purchase price and the remaining mortgage balance you will need to cover that difference as a down payment.
For example, if you purchase a house for $400,000 and the remaining mortgage on the home is $350,000 you will need to put $50,000 down to complete this transaction.
Can the seller carry a second position lien during a VA Loan Assumption?
Yes, they can!
Now that we have that out of the way, a lot of you are probably wondering “what does ‘carry a second position lien’ mean?”
Carrying a second position lien, or “carrying the down”, “carrying a second”, “seller-carry”, “seller-financing” etc. refers to a transaction whereby the seller agrees to let you make payments to them for the amount that would have been your down payment.
To use our above example, the buyer could assume the $350,000 mortgage, and then make monthly payments to the seller to pay off the $50,000 difference in the purchase price, rather than having to bring $50,000 down.
Usually, when you do this the seller will charge interest, and perhaps there will be a balloon payment—meaning that after a certain amount of time the remainder of the note will be due at once.
Can the seller use the VA Loan again after allowing their first VA mortgage assumption?
Yes, you absolutely can use the VA loan again. Having a VA loan assumed by a homebuyer isn’t a bad thing at all. It isn’t like defaulting on the mortgage, getting foreclosed on, or anything else!
How do assumable VA loans affect your entitlement?
That depends on whether or not the homebuyer has a certificate of entitlement to utilize the VA loan themselves—i.e. they are an eligible service member or veteran, with remaining entitlement.
If the homebuyer is eligible to use the VA loan and has remaining entitlement, then you can ask them to formally substitute their entitlement for yours to reinstate your entitlement to buy another home with zero down!
If the homebuyer is ineligible for the VA loan in their own right or has no remaining entitlement, then you will unfortunately not be able to recoup your entitlement until they have paid off the VA loan that they assumed from you.
How Assumable VA Loans affect the seller’s remaining entitlement
If the homebuyer is eligible to use the VA loan and has remaining entitlement, you can have them formally substitute their entitlement for yours to reinstate your entitlement to buy another home with zero down!
If the homebuyer is ineligible for the VA loan in their own right or has no remaining entitlement, then you will unfortunately not be able to recoup your entitlement until they have paid off the VA loan that they assumed from you.
How VA Loan Assumptions affect the buyer’s remaining entitlement
If the buyer is eligible for the VA loan and agrees to substitute their entitlement for the sellers, then it would be the same as if they had purchased the home with a mortgage value equal to the current mortgage.
If the buyer refuses to agree to substitute their entitlement then I guess it wouldn’t affect their entitlement at all…but don’t be this jerk. You’re getting to assume a loan with all sorts of great benefits, and you’re not going to need the entitlement for the next few years anyway—and can recoup it when you do need it again—so let the seller have their entitlement back if they want it.
What happens if the buyer defaults on the VA Loan they assumed from me?
Your legal liability for the debt doesn't automatically disappear upon completing an assumption. VA homeowners must ask for and obtain a release of liability from the lender or servicer.
Without a release of liability, VA homeowners could take a significant credit hit if the person assuming their loan later makes late payments or defaults on the mortgage.
Are FHA Loans Assumable?
All FHA loans are generally assumable, as long as the lender approves the sale. For loans originated on or after Dec. 15, 1989, the lender must approve a sale by assumption as long as the buyer is found to be creditworthy. Under special circumstances (such as death and inheritance), though, the lender isn’t entitled to check the creditworthiness of the buyer and doesn’t have to approve the sale.
Are USDA Loans Assumable?
USDA loans are assumable in two ways:
→ New rates and terms. Most USDA loans are assumable in this manner, which transfers responsibility for the mortgage debt to the buyer but also adjusts the debt by amortizing it with new rates and terms.
→ Same rates and terms. Available only in special circumstances, this type of assumption is usually reserved for family members who are exchanging the title of a property. In these cases, the rates and terms of the original mortgage are preserved and no review of the buyer’s creditworthiness nor appraisal of the property itself is required.
Are VA Loans Assumable?
Assumable VA loans are the best, but they do have additional rules and qualification requirements that govern exactly how:
→ Loans originated before March 1, 1988, are “freely assumable,” which means the assumption doesn’t have to be approved by anyone.
→ Loans originated after March 1, 1988, are assumable, if the lender approves, the buyer is deemed creditworthy, and a processing fee is paid.
Because VA loans are provided by the U.S. Department of Veterans Affairs, borrowers normally must be active-duty service members, veterans, or eligible surviving spouses to qualify for a VA loan. Note that in cases of assumption, however, the person assuming the loan isn’t required to be affiliated with the military.
By the way, if you didn’t know the answer to this question by now, you weren’t paying attention to the rest of the article, ha-ha
Are Conventional Loans Assumable?
Conventional loans can be assumed: sometimes. In most cases, they aren’t assumable because the mortgage contract contains a due-on-sale clause, which allows the lender to demand you pay the entire remaining loan amount as soon as the property is sold.
However, if you have a conventional adjustable-rate mortgage (ARM) and meet certain financial qualifications, your mortgage may be eligible for the assumption. Fannie Mae — one of the two mortgage agencies that set rules for conventional loans — allows for assumable ARMs so long as the borrower doesn’t exercise any option they may have to convert the loan to a fixed-rate mortgage.
