A Guide to VA Loan Assumption: Key Insights

The VA loan program, supported by the U.S. Department of Veterans Affairs, provides significant benefits to eligible veterans, active-duty service members, and certain National Guard and Reserve members. Among these benefits is the option for VA loan assumption, a feature that can be advantageous for both buyers and sellers. This blog article delves into the essentials of VA loan assumption, explaining what it entails, how it functions, and the benefits and considerations involved.

WHAT IS A VA LOAN ASSUMPTION?

VA loan assumption allows a buyer to take over the seller's existing VA loan, with all of its existing terms and conditions. This means the buyer assumes responsibility for the remaining balance, gets the interest rate of the original borrower, and assumes the existing repayment schedule. Assumed loans, therefore, typically have a duration of less than 30 years and the new buyer can come into the purchase with some equity.

Notably, the buyer does not need to be a veteran or service member to assume a VA loan, broadening the appeal of VA Loan Assumption to a larger audience of potential buyers. However, the seller will give up some or all of their entitlement if they allow a non-Veteran to assume their loan.

Documentation & Cash to Close:

A buyer assuming a VA Loan should always ask to see the original Loan Amortization Table and a copy of the seller’s most recent Mortgage Statement, to help reliably ascertain the actual loan balance, payment, interest rate, and how many years/months are remaining on the loan. These are critical pieces of information which a buyer must know from the outset.

Often, a buyer assuming a VA loan will be required to bring some cash into the transaction to compensate the seller for some or all of the equity in the property. This will vary largely from case-to-case. The buyer should understand that the longer the property is in escrow, the more cash down they will have to come in with. Typically, the older the VA loan and less time remaining to pay the balance off, the more cash a buyer will need.

Eligibility and Approval:

- The buyer must meet the lender's credit and income criteria to qualify for the assumption.

- The seller’s loan payments must be current or the lender will not allow the assumption to proceed to underwriting.

- The VA must approve the assumption, ensuring both that the seller’s loan is in a position to be assumed and ensuring the buyer (if a Veteran) has sufficient entitlement to assume the loan . If the assumption is by a non-Veteran or if the assuming Veteran does not have sufficient entitlement, the seller may lose some of their entitlement with the assumption.

Release of Liability:

Sellers should obtain a release of liability from the lender and new buyer, which frees them from future obligations related to the loan. This step is crucial for protecting the seller's financial interests.

Funding Fee:

The buyer may need to pay a VA funding fee, which is generally lower than that for a new VA loan. This fee supports the VA loan program. At the time of writing this article, the funding fee for an assumption is 0.5% of the loan balance, unless the borrower qualifies for a funding fee exemption. This amount is significantly lower than the funding fee for new loan and refinance loans, which currently range from 1.25%-3.3%, depending upon circumstances.

Transfer of Entitlement:

If the buyer is a veteran or service member, the seller will usually want the buyer to substitute their entitlement for the seller's, freeing the seller's VA loan entitlement for future use.

BENEFITS OF VA LOAN ASSUMPTION

Lower Interest Rates:

Buyers can benefit from reduced monthly payments if the existing VA loan has a lower interest rate than current market rates.

Closing Cost Savings:

Assumption is usually more cost-effective than securing a new loan, also because it involves lower closing costs and fees. For example, since an appraisal would not normally be required, this would be a cost that a buyer would not have to pay. There are also no loan origination fees or points paid, as it is not a new loan. As mentioned previously, the funding fee is also significantly less than for a new loan.

Simplified Process:

The assumption process is somewhat more straightforward than applying for a new mortgage, appealing to both buyers and sellers, so long as you are working with experienced Military Realtor(s) who understand the process of VA Loan assumptions. With a VA Loan assumption it is critical to keep things moving, by timely responding to all requests for information and returning any missed calls promptly. Diligence is the key to a successful assumption. This is especially important on the Buyer-side.

Less Time to Pay Off the Loan:

Because a new buyer is assuming a loan in process and already partially paid down, there will be less time than the usual 30 years remaining on the loan. This can mean a significant savings over the long run.

CHALLENGES OF VA LOAN ASSUMPTION

Entitlement Impact:

If the buyer is not a veteran or does not substitute their entitlement, some or all of the seller's VA loan entitlement may remain tied up until the loan is fully repaid.

Lender Approval:

Not all lenders may approve a loan assumption, so discussing this option with the lender early in the process is important. All VA Loans are eligible for assumption, but various factors can impact whether the assumption is approved.

Timing:

Loan assumptions can often take many more months to close than a regular, new VA Loan sale. This may be because the VA lenders are short-staffed in their assumption departments. It can be difficult to get in touch with the people at the lender handling the assumptions, as you are usually working will a call center versus one individual. As mentioned above, the important thing to remember is that diligence and follow up, particularly on the Buyer-side contribute greatly to the time it takes to process a VA Loan Assumption.

CONCLUSION

VA loan assumption offers potential savings and a somewhat streamlined, though often lengthier, process for both buyers and sellers. However, understanding the requirements and implications is crucial. Buyers should ensure they meet the necessary qualifications, while sellers should secure a release of liability to protect their financial interests. By carefully considering these factors, both parties can decide if VA loan assumption is the right choice for their situation.