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Veterans Affairs (VA) Loan Assumption, Good Deal for Me?

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Veterans Affairs (VA) Loan Assumption, Good Deal for Me?

Mortgage interest rates have hit a 20-year high with average new mortgage rates over 6%. Higher rates (and payments) can make it hard for new home buyers to stay on budget. Before the spike, many people got new or refinanced mortgages for under 3% interest. For a seller with a low-interest rate, allowing a buyer to assume your VA loan could be a win-win scenario for both of you.

What is VA loan assumption?

A VA loan assumption is when one person takes over an existing VA mortgage loan from another.  The home buyer takes on (assumes) the terms, payments, interest rate, and loan balance from the original borrower as part of the buying process.

All VA mortgages loans are assumable. And anyone is eligible to assume an existing VA mortgage, not just veterans. Buyers must still meet the lender’s creditworthiness, income, and debt-to-income ratio criteria.

I’m a buyer, why consider a VA loan assumption?

Buyer Pros:

Lower interest rates: You could save a lot of money on interest over the long term if the assumable VA loan has a lower rate.

Lower VA loan closing costs: A VA home inspection is not required. You only pay the 0.5% funding fee to assume an existing VA mortgage. There’s no funding fee if you are a veteran with a VA disability, Purple Heart recipient, or surviving spouse receiving Dependency and Indemnity Compensation.

Buyer Cons:

Limited property options: Only shopping for homes with an assumable VA loan will narrow your choices.

Seller’s loan terms: Assuming a VA loan means accepting the existing loan’s terms as is, such as interest rate, loan balance, and repayment period. This may not align with your needs.

Cash on Hand: If the existing VA mortgage is less than the home sale price, you must make up the difference. That means a down payment from savings or taking out a second mortgage. Taking out a second mortgage may be possible but has extra costs and makes the sale more complicated.

Time: Loan assumption is more streamlined than a new VA loan, but assumptions can take longer. Up to 6 months is not unusual. In the meantime, you can’t move in and the seller is waiting to receive money from the sale.

Possible Loss of Entitlement: The buyer may need you to substitute your own VA loan entitlement. This will reduce the amount you could borrow again until you pay off the assumed loan or refinance.

I’m a seller, why consider a VA loan assumption?

Seller Pros:

Increased buyer pool: VA loan assumption benefits may make the property more appealing to buyers. VA loan assumptions are also available to both veterans and non-veterans.

Competitive advantage: Buyers may offer a higher price for a home with a low rate, assumable VA loan.

Lower closing costs: The assuming buyer typically pays the assumption fees and charges.

Seller Cons:

Reduced cash flow: Money from the sale may be delayed until the loan assumption process is complete. You still have to make mortgage payments during that time.

Possible Loss of Entitlement: If the buyer qualifies, they can substitute their VA loan entitlement. Then your entitlement is reinstated. If the buyer doesn’t substitute (or can’t if not a veteran),  entitlement goes with the property. It is tied up until the new buyer pays off the mortgage. This would limit your ability to get another VA loan.

Release of Liability: Anytime you sell a home secured with a VA loan, YOU will still be liable to the government for payment unless:

-Your loan is paid in full.

-The VA releases you in writing from liability on the loan.

-You sell the property to an eligible veteran that assumes your loan AND substitutes their loan entitlement for yours.

Remember: Release from liability and VA entitlement restoration are two separate actions. Contact the VA office that guaranteed your loan and ask for the necessary forms and instructions.

Is VA Loan Assumption a Good Fit for Me?

A VA loan assumption can be a good fit for both buyer and seller when:

  • The existing VA loan interest rate is below the new mortgage interest rates.
  • You both (buyer and seller) can wait to complete a longer closing process.
  • The buyer offers a higher price or concessions in exchange for interest savings.
  • The buyer accepts the terms (years, payments, and interest) of the assumable mortgage.
  • The buyer can pay the difference between the home sale price and the assumable mortgage balance (downpayment).
  • The seller does’t need their VA loan entitlement restored. This allows non-veterans to make offers and assume the loan.

If you think a VA loan assumption might be a good fit for you as a buyer or seller, let your realtor know. They can get the word out and make inquiries for you and help negotiate a sale to benefit you both.

For more information on VA loans, including loan assumption, download the VA Home Loan Guaranty Buyer’s Guide at https://www.benefits.va.gov/HOMELOANS/documents/docs/VA_Buyers_Guide.pdf

If you’ve got questions about VA loans or other military financial topics, MFAA advisors can help.  You can find them here.