Mortgage Q & A: Mortgage Assumption or VA Loan?

Q: My husband and I are relocating and want to sell our house to our son, who doesn't have the best credit rating. He is a military veteran. Can he can assume our mortgage? It is a conventional loan and we only owe about $22,000 on our home, which is worth about $160,000. We are willing to let our son assume this loan without additional financing so he can have a secure and affordable home. How do we get this done?

A: Mortgage assumption rules can be tricky, as they are determined by terms specified in mortgage documents and lender requirements. Today, most conventional loans (not government loans like FHA, VA or Rural Housing mortgages) do not allow assumptions. We recommend calling your lender to check. In general, if an assumption is possible, your son would have to meet your lender's credit requirements -- just as though he were applying for his own loan.

You didn't indicate if your sales price is higher than the $22,000 balance. If it is, and your son assumes your mortgage, he'll have to come up with the difference by paying you a lump sum or borrowing it from somewhere.

If your loan is assumable, and you're selling him the home for just the outstanding balance, he has a good shot at being allowed to assume the loan even with shaky credit -- because the loan's balance is so much smaller than the home's value.

If a mortgage assumption is not available or the sales price is closer to the home's actual value, your son may be better off purchasing your home with a mortgage for veterans and military personnel. These loans have pretty flexible underwriting guidelines.

Commonly called VA loans, these mortgages do not require down payments or mortgage insurance. Your son would have to confirm his eligibility for a VA mortgage through the VA. The next step would be to apply through a VA-approved mortgage lender. VA home loans offer benefits not always available with other types of home loans. They are assumable and the VA home loan benefit can be used more than once under certain conditions. VA guidelines also allow the seller of a home (you and your husband) to pay your son's closing costs.

Note that the government doesn't set interest rates for VA loans. It's worth shopping for mortgage quotes from multiple VA lenders as fees and costs can vary. You can also compare the terms of your existing mortgage with mortgage quotes for a VA loan.

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