Veterans Affairs (VA) loans offer low interest rates, making them an attractive option, especially in times of sky-high interest rates for traditional mortgages. An even more interesting aspect of VA loans is that they are assumable. If you qualify for a VA loan, you may assume the loan and the low interest rate.
Are VA loans assumable? Yes. However, even more attractive is the fact that borrowers without military service qualifications may be able to assume VA loans. Read on to understand how that can impact your home-buying prospects.
What Does it Mean for a Home Loan to Be Assumable?
Assumable means that the loan can be transferred to another person. The person assuming the loan takes on the responsibility of the payments and becomes the new borrower. If the value of the mortgage loan is less than the sale price for the home, the homebuyer must secure a second mortgage for the difference or make a larger down payment.
Are VA Loans Assumable?
Yes, VA loans are assumable. Most government loans are assumable, while most other mortgages from private mortgage lenders are not. When a mortgage loan is assumed, the homebuyer will have the same mortgage payment as the seller. That makes the assumable nature of a VA loan a big selling point, especially if the seller had a good interest rate locked in.
The fact that VA loans are assumable can benefit both buyers and sellers. Sellers can assume a great interest rate, and buyers can potentially secure a much lower interest rate than the best available rates.
How to Assume a VA Loan in 4 Steps
Assuming a VA loan is simple, as long as you meet VA loan requirements. When taking out a VA loan the original borrower must meet specific military service requirements. In addition, the borrower must meet specific financial criteria and provide information such as credit score, proof of income and debt-to-income ratio.
When assuming a VA loan, the new borrower does not need to meet military service requirements, but they must meet the lender’s financial qualifications and provide details like proof of income and debt-to-income ratio.
The VA doesn’t publish minimum borrower requirements, but many lenders have their own financial requirements. That’s why shopping around and comparing lenders’ offers is important. Common lender requirements include:
- Credit score: You’ll need to have a minimum credit score of 580 for most lenders
- Down payment: A VA loan doesn’t require a down payment. But, to assume the mortgage, you may need a sufficient downpayment for a second mortgage.
- Income: You’ll need proof of enough income to support the loan amount. Usually, lenders will approve a loan up to 30% of total income.
- Funding fee: A VA loan assumption comes with a funding fee equal to 0.5% of the loan balance.
If you’re planning to assume a VA loan, here are the steps to take:
- Confirm eligibility with the information above and double-check with the lender.
- Gather required documents, including a government-issued ID, proof of income, savings, assets and information on total debt.
- Submit all required documentation to the lender. The lender will assess your ability to assume the VA loan.
- If approved, you will sign a document of assumption and pay any funding fees and requirement down payment.
What Happens to the Seller’s Entitlement When a VA Loan Is Assumed?
When a VA loan is assumed, the seller’s entitlement is not restored automatically. The seller must work with the lender to restore their entitlement, which can be used for future VA loan applications.
In the case of a veteran-to-veteran assumption, the buyer substitutes their VA entitlement onto the loan and releases the seller’s entitlement for use on a future VA loan. Veterans who make assumptions to nonveterans may leave their entitlement until the loan is paid off. In most cases, the seller can work with the lender to restore their entitlement.
In some cases, your VA entitlement would stay attached to the home and prevent you from using it elsewhere until the loan is paid off, so it’s important to double-check the buyer’s entitlement eligibility and whether your entitlement will be available again.
Advantages of a VA Loan Assumption
VA loan assumptions have numerous advantages, including:
- You don’t have to be an active-duty military service member, veteran or surviving spouse
- Lower VA funding fee
- Fewer closing costs than applying for a new loan
- Secure lower interest rates than a standard mortgage
- For sellers, have an additional selling point for buyers
Disadvantages of a VA Loan Assumption
While a VA loan assumption has a lot of advantages, there are a few disadvantages you should be aware of:
- If the loan is assumed by a nonveteran or someone without VA entitlement, the seller’s entitlement remains encumbered by the assumed loan.
- In that case, the seller can be severely limited in their ability to use a future VA loan.
- Buyers will still need to pay an assumption fee of usually 0.5% of the loan’s value.
Assuming a VA Mortgage
Assuming a VA mortgage offers buyers the opportunity to secure a lower interest rate and sellers a more attractive home option to attract buyers. As long as the buyer meets the lender’s financial criteria, they can assume the mortgage even if they’re not a veteran. Learn more about how to get a VA loan or find the best VA mortgage rates and veteran mortgage lenders.
Frequently Asked Questions
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Yes, a nonveteran can assume a VA loan. However, the seller’s VA entitlement may remain tied to that loan until it’s paid off.
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During the assumption process, the loan’s terms, including the repayment period and interest rate, remain the same. That means you’ll have the same repayment period and monthly mortgage payment as the original borrower.
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The lender must approve the loan assumption. If a potential borrower isn’t approved for a loan assumption, that borrower cannot assume the loan.
