Home LoansVA Loans: How They Work and Qualifications for 2021
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Are VA Loans Assumable?

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VA loans, backed by the U.S. Department of Veterans Affairs (VA), are an attractive option for military borrowers looking for a mortgage with no required down payment or mortgage insurance. Yet another benefit: VA loans are assumable.

A VA loan “assumption” allows a borrower to take over the terms of an existing mortgage, even if they aren’t a military service member, veteran or eligible surviving spouse. This type of transaction can benefit both homebuyers and sellers.

What is an assumable loan?

When a 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. The borrower assumes the loan’s interest rate, outstanding balance, repayment term and other related items.

NOTE: If you’re pursuing an assumable loan, you’ll need backup financing to cover the difference between the home’s value and outstanding mortgage balance. Your options may include a home equity loan or home equity line of credit (HELOC).

Are VA loans assumable?

The short answer: Yes, VA loans are assumable. If you currently have a VA loan and are considering a loan assumption as part of your home sale, it’s crucial to first understand your rights and how this transaction can affect your VA loan entitlement.

As a buyer, it’s best to consult a VA-approved lender and do your due diligence before deciding whether assuming a VA home loan is the best option for you.

What VA loan assumption means for buyers

One of the main benefits of assuming a VA loan is you don’t have to be a military borrower to take over mortgage payments from a current VA homeowner. You will, however, have to demonstrate your creditworthiness as a potential borrower.

Expect to meet the following general VA loan requirements:

  • 620 credit score
  • 41% debt-to-income (DTI) ratio
  • Enough residual income for your family size

Within 15 days of assuming the loan, you’re required to pay a VA funding fee directly to the VA that’s equal to 0.5% of the loan. There’s also a processing fee — which may cost $300 or more — and a credit report fee.

If you’re assuming a VA home loan and are also a qualified military borrower or surviving spouse, you might be eligible to substitute your own VA loan entitlement for the seller’s.

You may also qualify for a VA funding fee exemption if you’re:

  • Receiving compensation for a disability that resulted from your military service
  • Entitled to receive disability compensation but instead receive active-duty or retirement pay
  • Eligible to receive compensation due to a pre-discharge disability examination
  • A surviving spouse of a veteran who died in service or from a service-related disability

What VA loan assumption means for sellers

Home sellers also have to meet certain requirements to qualify for a VA loan assumption. This includes being current on mortgage payments by the time the transaction takes place.

In cases where a non-military borrower is assuming your loan, the VA won’t restore your loan entitlement until the home is sold and the loan paid in full.

The good news is you may still qualify for another VA loan if the buyer assuming your loan is also an eligible military borrower. When asking for an ownership transfer, you can also request that the VA restores your entitlement so you can reuse your VA loan benefits to buy a new home.

You’ll also want to ensure your lender releases you from liability on the loan as part of the mortgage assumption process. Otherwise, your credit reports and scores will be negatively affected if the assuming borrower makes late mortgage payments.

Pros and cons of VA loan assumption

Consider the following pros and cons when deciding whether to assume a VA loan or apply for a new mortgage.

Pros

You don’t have to be an active-duty military service member, veteran or surviving spouse to qualify for VA loan assumption.

You’ll have a lower VA funding fee and fewer closing costs than if you were applying for a new loan.

You could get a low mortgage rate, especially if rates are higher than they were on the loan’s origination date.

Cons

You’ll still need to meet general credit and income eligibility requirements.

You’ll likely need a down payment to cover the gap between the home price and loan balance.

Your seller is locked out of getting another VA loan until the assumed loan is paid in full — unless you can sub in your own VA entitlement.

 

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