Is a VA Loan Assumable?
What Is An Assumable Mortgage?
What does it mean to assume a mortgage?
An assumable mortgage is when someone takes over the existing home loan instead of applying for a new mortgage. With an assumable mortgage, the remaining balance, mortgage rate, repayment period, and other loan terms stay the same, but the buyer assumes the responsibility for the original mortgage.
This provides homebuyers the opportunity to purchase homes by simply taking over the seller’s original mortgage loan.
Is a VA Loan Assumable?
Not all home loans are assumable. In general, these mortgage types can be assumable:
- Loans backed by the Federal Housing Administration (FHA)
- Loans backed by the Department of Veterans Affairs (VA)
- Loans backed by the United States Department of Agriculture (USDA)
There are various requirements that will have to be met in order to assume each of these loans. Most conventional loans are not assumable.
Pros of Assuming a VA Loan
There are a lot of benefits to assuming a VA loan, especially in a housing market where interest rates are rising. With an assumed VA loan, the interest rate remains the same as it was when the seller originally purchased the home.
For example, let’s look at a seller who originally purchased their home for $200,000 in 2013 at an interest rate of 3.25 percent on a 30-year fixed loan. In this example, the principal and interest payment would be $898 per month.
Assuming current 30-year fixed rates averaged 4.10 percent, if you financed $200,000 at 4.10 percent for a 30-year term, the monthly principal and interest payment will be $966. Since the seller has been making payments for four years into the loan, they have already paid nearly $25,000 in interest on the loan.
When the buyer assumes the loan, they will save $34,560 over the 30-year loan due to the difference in interest rates. They would also save approximately $25,000 in interest that they will not have to pay on the mortgage since the previous owners already paid off $25,000.
Altogether, that comes out to $60,000 in savings!
Buyers are still required to pay a VA funding fee when assuming a VA loan, but the fee is typically about 0.5% of the remaining loan balance, which is significantly lower than a regular VA funding fee for a new VA loan.
You do not have to be a qualifying veteran or service member to assume a VA loan, but if you do qualify for a VA loan, you can use your VA entitlement to assume the VA loan and the seller’s VA entitlement will be fully restored.
Cons of Assuming a VA Loan
While you can save tens of thousands of dollars in interest and lower mortgage payments by assuming a mortgage loan, you may be initially required to come up with a very large down payment just to assume the loan in the first place.
If the home’s value has significantly appreciated since the seller initially purchased it, you as the buyer will be responsible for paying the difference between the remaining mortgage amount and the selling price.
This means if the home was originally purchased for $200,000, there is $175,000 remaining on the mortgage, and the home has now appreciated in value to $250,000, you as the buyer assuming the loan will be responsible for making up the difference between the remaining mortgage and the selling price.
VA Loan Assumption Requirements
The process for assuming a VA loan is different from getting qualified for a new VA loan, but there are some requirements that are virtually the same. The buyer works with the seller’s lender to demonstrate they meet all of the requirements to assume the VA loan.
The VA does not have requirements for borrowers, but lenders will have their own standards in terms of credit and debt-to-income.
Credit requirements for VA loan assumption tend to be lower than purchase requirements, starting anywhere from 580 to 600. This will vary from lender to lender. A buyer will also have to meet income requirements. Unfortunately with an assumption, you don’t have the option of shopping around with different lenders if your credit requirements do not meet the standards of the lender, since you will be required to use the seller’s lender.
VA Loan Assumption Down Payment
A down payment on a VA loan assumption will most likely be required to cover the difference between the selling price of the home and the remaining loan amount. This can make assuming a VA loan unaffordable for many buyers.
As an example of what this could look like, let’s say someone purchased a home with a VA loan for $250,000. When they turn around to sell it, they have a remaining $195,000. However, the home has appreciated in value and is now worth $280,000. Whoever assumes the original loan will have to make an $85,000 down payment.
VA Loan Assumption Process
There are several steps in the process of assuming a VA loan:
Determine your VA loan eligibility as a qualifying veteran, service member, or surviving spouse. If you are eligible for a VA loan, your VA loan entitlement will replace the seller’s and the seller’s VA entitlement will be fully restored.
If you are not eligible for a VA loan, you can still assume the VA loan. However, the seller’s VA loan entitlement will not be fully restored. This should not be an issue as long as the seller is aware they can only use their remaining entitlement to qualify for another VA loan.
Receive approval from the seller’s mortgage lender. Depending on the lender, you may be able to accomplish this in a matter of hours, or in some cases, it could take weeks.
If and when approval is received, you will then sign off on the assumption and pay the VA funding fee and any required down payment.
Contact a Loan Specialist
Have more questions about how a VA loan assumption works? We can help you! VeteransLoans.com is a VA-approved lender that offers conventional, FHA, and VA loan products. Our loan specialists can answer any questions you have and work with you to get you pre-qualified. Call 1 (888) 232-1428 to speak with a loan specialist today!