Assumable VA Loans: Can They Help You Buy a House?
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Richard Haddad Managing EditorRichard Haddad is the managing editor of HomeLight.com. He works with an experienced content team that oversees the company’s blog featuring in-depth articles about the home buying and selling process, homeownership news, home care and design tips, and related real estate trends. Previously, he served as an editor and content producer for World Company, Gannett, and Western News & Info, where he also served as news director and director of internet operations.
At HomeLight, our vision is a world where every real estate transaction is simple, certain, and satisfying. Therefore, we promote strict editorial integrity in each of our posts.
In today’s high-interest mortgage market, finding affordable homebuying solutions is more crucial than ever. If you’re eyeing a property with a VA loan attached, you might be wondering about the potential of assuming the loan to benefit from a lower interest rate.
This guide will walk you through the concept of an assumable VA loan. From understanding what it entails to navigating the requirements and process, we’ve got you covered. Whether you’re a veteran or not, discover how this option might be your key to a more affordable home purchase.
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What is a VA assumable loan?
A VA (Department of Veterans Affairs) assumable loan is a unique financial option that allows a qualified individual to take over the mortgage of a home with an existing VA loan. This means if you’re considering buying a home, you can assume the seller’s VA loan instead of taking out a new mortgage.
The most attractive feature of this arrangement is the potential to inherit the seller’s interest rate, which could be significantly lower than current market rates. According to data from the Government National Mortgage Association (Ginnie Mae), about 90% of all VA homeowners have a mortgage rate below 5%.
“One big advantage is obviously getting a lower interest rate,” says Eric Broesamle, a top Michigan real estate agent who has been helping home buyers for more than 22 years. “If the existing mortgage has a lower interest rate than the current rates, the assumable mortgage will allow the borrower to retain that better rate.”
A lower interest rate can lead to more manageable monthly payments and overall cost savings, clearing a path to homeownership that might otherwise be out of reach.
For example, if you assume a $400,000 VA loan at a 3% interest rate compared with a new loan at 8%, you can save $1,250 per month with the lower payment.
Broesamle adds, “A lot of buyers don’t know that this is an option.”
What are the requirements to assume a VA loan?
To assume a VA loan, there are specific requirements that both the seller and the buyer must meet. Here’s a breakdown of what you need to know:
- Eligibility: The person assuming the loan must meet the VA’s credit and income standards. This is to ensure that the new borrower has the financial capability to take on the loan.
- Approval from the lender: The current lender must approve the loan assumption. This involves a formal application process where the assuming borrower’s creditworthiness is assessed.
- VA entitlement: If the person assuming the loan is a veteran with available VA loan entitlement, they can substitute their entitlement for the seller’s. However, if the assumer is not a veteran, the seller’s VA loan entitlement may remain tied up in the property until the loan is fully repaid.
- Processing fee: A fee is usually charged by the lender to process a loan assumption.
- Release of liability: For the seller, it’s crucial to get a release of liability from the lender to ensure they’re not held responsible for the loan if the new borrower defaults.
Broesamle explains that for any potential buyer, assuming a mortgage mostly depends on the borrower’s creditworthiness. “I have the buyer talk to the lender initially, and I say, ‘Hey, these are some of the options, let’s see if we can get you approved.’ Plus, the approval process can be faster. It’s an easier qualification, especially if you have good credit.”
Understanding these requirements is the first step in determining if assuming a VA loan is the right path for you. Keep in mind that each lender may have additional stipulations, so it’s important to communicate clearly with the involved parties throughout the process.
Can I assume a VA loan if I am not a veteran?
The short answer is yes, you can assume a VA loan even if you are not a veteran or in the military. This aspect of VA loans is not widely known and can open doors for many potential homebuyers. Here are key points to understand:
- Eligibility for non-veterans: Non-veterans are eligible to assume VA loans. However, they must meet the lender’s credit and income requirements, just like any borrower would.
- Seller’s VA entitlement: If a non-veteran assumes the loan, the original borrower (who is a veteran) may not have their VA loan entitlement fully restored. This means the veteran may be limited in obtaining another VA loan until the assumed loan is fully repaid. For the seller, the most favorable VA loan sell/buy transaction would be a veteran-to-veteran assumption.
- Lender approval: Regardless of your veteran status, the lender must approve the assumption, ensuring that you are financially capable of taking over the loan.
What is the process to assume a VA loan?
Assuming a VA loan involves several steps, and understanding this process can help ensure a smooth transition. Here’s what you need to know:
- Find a VA loan to assume: Start by identifying properties with assumable VA loans. This can be done through real estate listings or by working with a Realtor.
- Review the loan terms: Before proceeding, review the existing loan’s terms, including the interest rate, remaining balance, and monthly payment amounts.
- Apply for assumption: Contact the lender servicing the VA loan and apply for the assumption. You’ll need to provide financial documents, similar to a standard mortgage application, to prove your creditworthiness.
- Lender’s approval: The lender will review your application to ensure you meet the VA’s credit and income standards. This process can take several weeks.
- Pay required fees: If approved, you’ll need to pay any assumption fees set by the lender, which can vary but are usually nominal. A typical VA funding fee is 0.5% of the loan amount.
- Release of liability: Ensure that the seller requests a release of liability from the lender. While there are entitlement considerations, this step can absolve the original borrower from responsibility for the loan after the assumption.
- Closing the assumption: Similar to a traditional home purchase, there will be a closing process where you officially assume the loan and all necessary paperwork is finalized.
How can I find a VA assumable mortgage?
Finding a VA assumable mortgage requires a bit of research and the right approach. Here’s how you can start your search:
- Work with a real estate agent: A knowledgeable real estate agent can be invaluable in this process. They can help identify listings with assumable VA loans and provide guidance on the assumption process.
- Check online listings: Some online real estate listings may indicate whether a home has an assumable VA loan. Pay close attention to the details in the property descriptions.
- Search assumption websites: You can search real estate sites like Roam that specialize in identifying home listings with low-interest-rate assumable mortgages. In addition, some areas have regional websites that break out local assumable mortgage listings, such as these examples in Washington and Portland.
- Hire an assumption service: There are specialized consulting and list firms such as Assumption Solutions and Take List that help homebuyers, sellers, and their agents complete a successful mortgage assumption.
- Contact local lenders: Reach out to lenders who specialize in VA loans. They might have information on properties with existing VA loans that are assumable.
- Explore military communities: Homes near military bases or in military communities might have a higher likelihood of having VA loans.
- Network with veterans: Veterans who are selling their homes — or know others who are — might be aware of available assumable VA loans.
- Social media and real estate forums: Joining relevant online groups and forums can help in finding leads on homes with assumable VA loans.
”If you are on the hunt for a home with an assumable mortgage,” Broesamle says, “this is where the value of an experienced agent shines. Your agent can search for you. That’s one way to make sure a property qualifies.”
He adds. “Once you find the home that you like, you need to reach out and talk to the seller’s agent and work with the seller in order to find out who their loan company is to make sure that you can assume the loan. Some mortgages are not assumable.”
Remember, while finding a VA assumable mortgage might require some extra steps, it could lead to significant savings and benefits in your homebuying process.
Pros and cons of assuming a VA loan
Assuming a VA loan can be an attractive option for homebuyers, but it’s important to weigh its advantages and disadvantages. Here’s a breakdown of the pros and cons:
Pros
- Lower interest rates: If the existing VA loan has a lower interest rate than current market rates, you can save significantly on interest over the life of the loan.
- Fewer closing costs: Assuming a loan often involves lower closing costs compared to getting a new mortgage.
- Faster closing process: The process can be quicker than applying for a new mortgage, as some steps, like property appraisal, may not be necessary.
- No down payment required: In many cases, assuming a VA loan doesn’t require a down payment, which can be a significant financial relief. However, you’ll need to pay the seller their equity.
Cons
- Eligibility and approval: You must meet the lender’s credit and income requirements, and the lender must approve the assumption, which isn’t guaranteed.
- Limited availability: Finding the home you want with an assumable mortgage can take time and effort.
- Potential for higher costs: If the assumed loan’s balance is less than the home’s purchase price, you may need additional financing to pay the seller’s equity. See more on this below.
- Seller’s VA entitlement: If you’re not a veteran, the seller might not regain their full VA loan entitlement until the loan is paid off.
As with any home purchase, be financially prepared
As with any home purchase, you’ll want to be financially ready with the upfront money needed to close the deal. When assuming a mortgage loan, you will need to compensate the seller for the equity they’ve built up in the property. The equity is typically a combination of appreciation and what they have paid off on their loan. As part of the purchase price, these funds might come from your own savings or be financed through a separate loan.
Here’s an example: If you buy a $450,000 house from a seller who has an outstanding VA loan balance of $250,000, they have $200,000 worth of equity that belongs to them. You will need to pay the seller that $200,000 when you close the deal.
How much does it cost to assume a VA loan?
The costs associated with assuming a VA loan are generally lower than those for obtaining a new mortgage, but there are still some expenses you should be aware of.
You’ll typically need to pay the 0.5% VA funding fee for a loan assumption. The funding fee applies only to the loan amount, not the purchase price of the home. For example, on a $400,000 loan, the fee would be $2,000. This fee can be waived for veterans receiving VA disability compensation.
Other fees you might encounter can include:
- Credit report fee
- Lender processing fee
- Title search and insurance
- Miscellaneous fees (inspection, document prep, notary, etc.)
And don’t forget to budget in the seller’s home equity we mentioned above.
Unlike traditional mortgages, most assumable mortgages don’t require that you pay for an appraisal, but it’s often recommended. Some lenders may still require one.
While these costs can add up, they are often less than the expenses involved in closing a new mortgage. It’s important to get a detailed breakdown of all fees from the lender before proceeding with a VA loan assumption.
Which other mortgage loans are assumable?
Apart from VA loans, there are other types of mortgage loans that are assumable, although they are less common. Here’s a brief overview:
- FHA loans: Loans insured by the Federal Housing Administration (FHA) are typically assumable. Like VA loans, the person assuming the loan must qualify and be approved by the lender.
- USDA loans: Mortgages backed by the United States Department of Agriculture (USDA) can also be assumable. These loans are specific to rural and suburban homebuyers.
- Some adjustable-rate mortgages (ARMs): Some ARMs may be assumable. This depends on the lender, and the new borrower may need to agree to give up the option to convert the ARM to a fixed-rate mortgage. In some situations, an ARM loan can be disqualified from being assumed by a third party.
Are conventional loans assumable?
The majority of conventional mortgages offered by private lenders are not automatically assumable unless there are special circumstances, such as in a divorce or after a death. To qualify, the homeowner’s mortgage contract would need an “assumption clause.” Otherwise, most conventional loan agreements contain a “due on sale” clause that requires the mortgage to be paid in full when the original borrower sells the property.
Choosing a buyer’s agent
It’s important to note that the terms and conditions for assuming these loans can vary. If you’re considering assuming a mortgage, consult with the lender or a professional advisor to understand the specific requirements and processes involved. Partnering with a top-rated buyer’s real estate agent is a good place to start.
Should I assume a VA mortgage loan?
Deciding whether to assume a VA mortgage loan is a significant decision that hinges on your individual circumstances and the specifics of the loan in question. Here are some final considerations to help guide your decision:
- Assess the interest rate: If the VA loan’s interest rate is substantially lower than current rates, assuming the loan could lead to considerable savings.
- Evaluate financial readiness: Ensure you meet the lender’s credit and income requirements and can comfortably manage the loan payments.
- Consider the long-term impact: Understand how assuming the loan will affect your financial situation over time, including any potential limitations for the seller if you are not a veteran.
- Review the costs: Be clear on the costs involved in assuming the loan and how they compare to obtaining a new mortgage.
- Seek professional advice: Consult with a financial advisor or a mortgage professional to get personalized advice based on your financial goals and situation.
“It’s a great tool for this market,” Broesamle says. “And right now, with the high interest rates, this is a great way to maintain a lower rate, especially if you have some cash to put down. So it could be a big gain for you.”
Ultimately, assuming a VA loan can be a smart financial move for many homebuyers, offering potential savings and a streamlined purchasing process. However, it’s crucial to approach this decision with a thorough understanding of the benefits and responsibilities involved.
HomeLight can connect you with a top real estate agent familiar with assumable VA mortgage home listings in your market. With the right agent and the right home, an assumable VA loan can put you on the front doorstep of affordable homeownership.
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