During the whirlwind of closing on the home you purchased, the title company representative reviewed all sorts of important details—the interest rate, monthly mortgage payment, and the first payment’s due date.
Also, somewhere in the midst of that lengthy signing session, they might have mentioned that your VA home loan was assumable if you ever decided to sell. By that point, your eyes probably just glazed over at that information.
While not a vital tidbit at the time, the option of having someone assume your VA loan in the future could be an essential part of your home sale marketing plan, especially during times of high interest rates.
Assumable mortgage. What does that even mean?
A loan assumption means a buyer can step in and start paying the previous homeowner’s mortgage without creating a new one. There are a few items of red tape, of course, but that’s the basic idea. Once you understand the big picture, you’ll probably have a few more questions.
1) Who can assume the mortgage?
Pending lender approval (not all VA lenders allow assumptions), if a buyer qualifies for the payment amount, anyone can assume the mortgage: civilian, active duty military, or veteran. However, it's important to note that:
If the loan assumer isn’t a veteran, the seller will lose his VA loan benefit because it stays with the property and mortgage until it’s paid off.
This is an important fact to keep in mind if you want to use your VA loan in the future. You’re at the mercy of the assumer to maintain payments and keep the mortgage in good standing.
The buyer also needs to meet lender-specific requirements. Some of these parameters include:
- Buyer takes on all mortgage terms and obligations.
- The buyer has a 12-month history of on-time mortgage payments.
- Buyer meets the lender’s financial benchmarks: income, credit, and a debt-to-income ratio.
- The buyer pays the funding fee, which is 0.5% of the loan balance.
- Buyers can show an excess of cash after the month’s expenses are met.
Read more important facts in 8 Things Military Home Buyers Need to Know About VA Loan Assumptions.
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2) Why would someone want to assume a mortgage?
For a Lower Interest Rate
A buyer might want to take advantage of that locked rate if the home was bought at a lower interest rate years ago. Remember, the buyer takes over the exact terms of the existing loan, including the years remaining, interest rate, and monthly payment.
Savings on Closing Costs
A buyer wouldn't have to pay the bank’s origination fee or an appraisal, but real estate professionals recommend obtaining an appraisal anyway.
Assuming a Loan in a Divorce
For instance, the spouse may take over the loan and keep the remaining equity in the property.
Savings on VA Funding Fee
The fee is only 0.5% for an assumed VA loan. This is a significant savings. You may be exempt from the funding fee depending on your veteran status.
Examples of when veterans and surviving spouses don’t pay the funding fee:
- The veteran has a disability rating 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 are exempt.
If a loan assumption isn’t possible, position your property for selling to a VA home loan buyer.
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3) This sounds great! What’s the catch?
A VA loan assumption could put your future VA home loan entitlement at risk if not done correctly. Read on to protect your future borrowing options.
Release of Liability
This is important to understand. 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 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 military home seller, you’ll likely want to ask the buyer to substitute their VA loan benefit with yours instead of having yours tied up in this home. If you don’t obtain the substitution of entitlement, your access to a future zero down payment is limited.
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4) What else should I know about a VA loan assumption?
As the homeowner, 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 you can make up the difference by selling the property. You’ll also be expected to pay a processing fee of a few hundred dollars, depending on your state, and possibly the cost of a credit report.
You’ll want to market the savings for the buyer. For 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 then obtain a second mortgage at a higher interest rate to cover the remaining 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 working with an experienced lender adept with the details is critical. However, the home seller must be proactive in protecting future VA entitlements. Obtaining the release of liability and substitution of entitlement allows the seller full access to VA loans in the future.
Have you either assumed or sold a VA loan as an assumed loan? How did it work out for you? Do you have any tips to share with your fellow military families?
