As you’ve scoured ads for homes for sale, you’ve probably noticed savvy military home sellers marketing their properties with "assumable VA loan" written in the property’s description. They should! A VA home loan assumption is a fantastic benefit for the right military and veteran buyers.
At first, as a military home buyer, you’re probably most interested in the low interest rate, but there are a few more reasons a VA loan assumption is attractive:
- You won't pay closing costs or appraisal fees (but ask your agent if you should get a home appraisal anyway).
- The lower interest rate could save thousands over the life of the loan.
- You don’t have to apply for a new VA home loan.
- An assumption might be a housing solution for a divorcing couple.
Buying a home with a too-good-to-be-true low interest rate by assuming the seller's VA loan sounds like a fantastic opportunity, right? It might be, but you will need two things: time and money. Watch this episode of PCS Masterclass from Realtor Karen Hall where she explains more, then read on for more important assumable loan details.
What Is an Assumable VA Loan?
At the very basic level, a VA loan assumption allows a buyer to take over the current homeowner’s mortgage, including interest rate, without creating an entirely new mortgage. Happy assumers love to rave about the savings, but sometimes they leave out the critical devil-in-the-details drawbacks. Not everything about a VA loan assumption is good to go.
Since there are plenty of details you can't afford to miss before taking on the process, we've put together some pointers as you think about assuming a VA loan.
Key Tips for VA Loan Assumption
1. You need an experienced real estate agent and VA loan lender.
Taking on a VA loan assumption isn’t for newbies. Your agent and lender should each have loads of experience executing the transfers. There are too many i’s to dot, t’s to cross, and tricky details to manage for an inexperienced real estate team.
2. As the assumer, you’ll need to meet financial benchmarks.
Like any bank loan, VA lenders want to know you’re a good investment and can repay your loan on time. So expect the lender, at a minimum, to check your mortgage history, income, credit score, and debt-to-income ratio.
3. An assumption means you’ll take on all loan terms, not just the interest rate.
Be prepared to meet the exact terms of the loan, including monthly payments and the number of years remaining. Work with your agent to understand every detail of the contract. Also, remember that a VA assumption loan must be for a primary residence.
4. You can save money with an assumable loan, but you’ll probably pay a VA loan funding fee.
A VA loan assumption can save thousands of dollars if the owner has a low interest rate, but don’t forget about paying the funding fee, 0.5% of the loan. However, there are exemptions for military members with service-related disabilities. A surviving spouse may also hold exemption status.
5. You cannot finance your down payment with a VA loan assumption.
One of the best things about a new VA loan is that you don’t need a down payment. Unfortunately, this isn’t true for an assumption. You’ll have to make up the difference between the home price and the remaining loan balance as a down payment.
For example, if there’s $500,000 left on the mortgage and the sale price is $700,000, it's up to you to find $200,000. Depending on the numbers, you may not save enough with a low interest rate to make the assumption worthwhile.
6. Non-military buyers can assume a VA loan.
Wondering who can assume a VA loan? It's a common misconception that only military buyers can. But the truth is that you could compete with civilian buyers hoping to save some cash with a low interest rate.
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7. The military home seller will ask you to substitute your VA loan entitlement.
The seller and buyer's VA loan entitlement availability is a significant consideration for several reasons. After the sale, home sellers want to be free of the property, including their VA loan entitlement, so that they can use it again in the future. If they don’t, they’re on the hook for the loan if you default, so it's in their best interest to have a signed Release of Liability and Substitution of Entitlement.
This leads us to an important question. Do you have enough available VA loan entitlement for the purchase? If you own other properties, you’ll have to dig into your VA accounts and make sure you’re an assumption candidate.
8. The VA loan assumption process isn’t fast.
Between finding a seller with an assumable loan, shoring up your VA loan eligibility, preparing your finances, and working with a VA lender who probably isn’t in a hurry to offer a loan with a significantly better rate than current interest rates, you could be in for a three- to six-month wait. You may go through the months-long process and not get approval, which could be devastating to a military life timeline.
A VA loan assumption is an exceptional tool to bring your homeownership dreams to life. But it's not a perfect fit for every military home buyer, especially if you’re short on time or money. Both shortages are hard to avoid during military life! Finding experienced real estate professionals to lead the way is crucial for a clear understanding of what’s required and a smooth transaction overall.
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