4 Common Questions About VA Home Loan Assumption
Somewhere during that whirlwind of closing on the home you purchased, the title company representative reviewed all sorts of important details—your interest rate, your monthly mortgage payment, and when your first payment would come due.
And somewhere in the midst of that lengthy signing session, it may have been shared that your VA home loan could be assumable if you ever decide to sell. By that point, your eyes probably just glazed over at that information.
While not a vital tidbit at the time, the option for someone to assume your VA loan in the future could be an important part of your home sale marketing plan.
Assumable mortgage. What does that even mean?
A loan assumption means that a buyer can step in and start paying the previous homeowner’s mortgage without having to create a brand new mortgage. There are a few items of red tape, of course, but that’s the basic idea. Once you understand the big picture, you probably have a few more questions, like the following.
1) Who can assume the mortgage?
Pending lender approval (not all VA lenders allow assumptions) and if a buyer qualifies for the payment amount, anyone can assume the mortgage: civilian, active duty military, or veteran. If the loan assumer is not a veteran, then the seller will lose his VA loan benefit because it stays with the property and mortgage until it is paid off.
The buyer will need to meet lender specific requirements. Some of these parameters include:
- Buyer takes on all mortgage terms and obligations.
- Buyer has a 12-month history of on-time mortgage payments.
- Buyer meets financial benchmarks: income, credit, and possibly a debt-to-income ratio that is less than 41 percent.
- Buyer pays the funding fee, which is 0.5% of the loan balance.
- Buyer can show an excess of cash after the month’s expenses are met.
Are you new to Homeownership and Military Life? Read about the challenges and perks.
2) Why would someone want to assume a mortgage?
Someone who seeks a lower interest rate: If the home was bought at a lower interest rate years ago, a buyer might want to take advantage of that locked rate. Remember, the buyer takes over the exact terms of the existing loan, including the years remaining, interest rate, and monthly payment.
Someone who wants to save on closing costs: A buyer wouldn't have to pay the bank’s origination fee or an appraisal, but it’s recommended that you obtain an appraisal anyway.
Someone in a divorce situation may want to assume a loan: For instance, the wife may take over the loan and keep the remaining equity in the property.
Someone who wants to save on the VA funding fee: For an assumed VA loan, the VA funding fee is only 0.5%, representing significant savings. Or, depending on your veteran status, you may be exempt from the funding fee altogether.
Here are possible reasons veterans and surviving spouses are excluded from the funding fee:
- The veteran experienced a disability resulting from time in service or due to a pre-discharge disability.
- The veteran is entitled to receive compensation.
- Surviving spouses of a deceased veteran or a veteran with a service-related disability.
Related: If a loan assumption isn’t possible, position your property for Selling to a VA Home Loan Buyer.
3) This sounds great! What’s the catch?
If not done correctly, A VA loan assumption could put your future VA home loan entitlement at risk. Read on to protect your future borrowing options.
Release of liability: This is important to understand—according to Veterans United Home Loans, homeowners have to 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 or lose a portion of their entitlement if the person assuming their loan later makes late payments or defaults on the mortgage.
VA Loan entitlement: As the home seller, you’ll likely want to ask the home buyer to substitute their own VA loan benefit instated of having yours tied up in this home. If you don’t obtain the substitution of entitlement, your access to a future zero down will be limited.
4) What about me, the homeowner? Why do I care?
As the homeowner, what does this mean to you? If you have an assumable loan—VA or FHA— you can offer an attractive financing package as a selling point while marketing your home to prospective buyers.
But first, as the home seller, the VA requires you to meet basic criteria. Your loan must be up to date without late payments, or the difference can be made up through the sale of the property. You’ll also be expected to pay a processing fee of about $300, depending on your state, and possibly the cost of a credit report.
So, now more about marketing the savings for the buyer. As an example, for the $200,000 home with a remaining mortgage balance of $150,000 at 3%, a prospective buyer could assume your loan with very low closing costs and could then obtain a second mortgage at a higher interest rate to cover the rest of the balance.
Or, maybe the benefit to you is knowing that when you head off to your retirement village, your kiddos can assume that mortgage and have a little equity to boot!
All in all, assuming a VA loan is an attractive option for both the buyer and seller if executed correctly. These are not everyday transactions, so it’s essential to work with an experienced lender adept with the details. The home seller must be proactive to protect future VA entitlements, however. Obtaining the release of liability and substitution of entitlement allows the seller full access to VA loans in the future.
What about you? Have you either assumed or sold a VA loan as an assumed loan? How did it work out for you? Any tips to share with your fellow military families?