One of the biggest benefits of a VA home loan is that it can be assumed by a future homebuyer. This can result in huge monthly savings to a buyer when the interest rate of that existing VA loan is lower than the rate available during a new mortgage application. But what if you’re not a veteran – can you still assume a VA loan?
Who is Eligible to Assume a VA Loan?
The short answer is that almost everyone is eligible to assume a VA loan, even if they’re not a veteran or have no connection to military service. The primary requirements for a VA loan assumption are similar to the ones for obtaining a new home loan – that is, the buyer must qualify financially for the assumable loan by submitting a loan application to the seller’s lender – also known as the servicer – that owns the original VA loan.
However, if the buyer is not a veteran, this will have an impact on the seller’s VA eligibility going forward. More on this below.
Qualifying to Assume a VA Loan as a Non Veteran Buyer
The process for qualifying for a VA loan assumption is very similar for veteran and non veteran buyers. Once you make an offer on the home and come to a formal purchase agreement with the seller, the seller will need to contact the mortgage servicer to initiate the loan assumption. From there, the servicer will send the buyer a packet of information to complete, including a mortgage application.
The servicer will process this mortgage application, along with any other supporting documents you provide them, and make a determination if you qualify to assume the loan. Qualification is based on that servicer’s standards for income requirements, credit score, whether you’ve had any recent late payments, and other factors related to your financial situation.
The financial qualifications for a VA loan assumption are the same whether the buyer is a veteran or non veteran. As with any loan, the servicer is making a determination as to whether that buyer can reasonably make their monthly payments on the property based on their assets and income.
The buyer has to meet the financial standards set forth by the servicer, which are influenced – but not dictated – by the VA guidelines. For example, according to the VA, there is no minimum credit score required to obtain or assume a VA loan – it’s up to the lender’s credit requirements as to the minimum credit score they’ll allow for a VA loan assumption. Some servicers will have stricter requirements than others, so it can be difficult to know up front whether or not you’ll qualify to assume a VA loan with a particular servicer.
Down Payment Requirements for Assuming a VA Loan
Another financial consideration will be the amount of the down payment. When assuming an existing loan, you must be able to pay any difference between the loan amount and the purchase price as your down payment. For example, if you intend to purchase a home for $300,000 and there is an existing assumable loan on the property for $200,000, you’ll need to have a down payment of $100,000 at closing.
Although there are a few small lenders who advertise the ability to finance the down payment as a secondary mortgage, the servicer will not be able to do this organically – so if you don’t have $100,000 in cash in this example, your assumption application will be more complex as you have to work with a second lender to obtain the required down payment funds. For this reason, if you don’t have a heap of cash, it will be easier for you to assume a VA loan where the loan balance is fairly close to the purchase price.
The good news is that there are currently many homes like this, given the prevalence of rock bottom interest rates from 2020 to 2022. If you live in the National Capital Region and want to find assumable VA mortgages, you can use our AssumeList™ tool to quickly and easily identify homes for sale that have assumable VA mortgages.
Costs of Assuming a VA Loan
The closing costs for assuming a VA loan are the same whether the buyer is a veteran or non veteran. Because there is no new loan being originated, the closing costs are actually less for assumable mortgages compared to obtaining a new home loan. For example, there are no origination fees when assuming an existing VA loan, which are often around 1% of the sales price when obtaining a new loan.
In addition, the VA funding fee is greatly reduced when assuming a VA loan. The VA funding fee for a new home loan ranges between 1.5% to 3.3% depending on the amount of your down payment and whether or not you’ve used your VA eligibility in the past. However, the VA fee when assuming a VA loan is only .5%. This assumption fee is the same amount regardless of whether the buyer is a veteran or not. Unlike with a new VA loan though, the funding fee for a VA loan assumption must be paid at closing and cannot be wrapped into the loan. Additionally, the VA assumption fee is waived for anyone also exempt from paying the standard VA funding fee (e.g. veterans who receive compensation for service-connected disabilities) For a complete list of exemptions please see the Department of Veteran’s Affairs website.
You also won’t need to pay for an appraisal on a VA loan assumption. Since an appraisal was already completed when the current owner purchased the property, no subsequent appraisal is required, which typically saves the buyer $400- $700 depending on the property and region.
Finally, you’ll save additional money in the form of lender’s title insurance – since there is no new mortgage, the existing lender’s title insurance policy will remain with the existing VA loan. By not having to purchase a new lender’s title insurance policy you’ll save another couple hundred to several thousand dollars in closing costs depending on the size of the loan.
Other elements of the closing costs will be the same regardless of whether or not you’re doing a VA loan assumption or obtaining a new loan. For example, you’ll still have to pay state or local transfer taxes, since these are charged when title is transferred to a new buyer regardless of the type of financing. You’ll also need to pay processing fees for title work and any administrative fees charged by your agent’s brokerage or attorney.
Assuming a VA Loan as a Non Veteran Family Member
There are situations in which non veteran family members might want to assume a VA loan. For example, if the married owners of a home decide to divorce, the non veteran spouse can assume the VA loan if they are getting the property as part of the divorce decree. Or, if the veteran member of a household dies, the surviving spouse can assume the VA loan if they are inheriting the property.
These types of assumptions are quite common and are generally quicker than assumptions done between sellers and buyers with no familial relationship to each other. Most servicers can complete loan assumptions to family members in about half the time compared to a loan assumption between a non-related buyer and seller. By comparison, most loan assumptions between non-family members can take up to four or five months, while loan assumptions between family members often only take 60-90 days.
The non-veteran family member will still have to obtain the lender’s approval for the VA loan assumption, so that the lender can ensure the family member is capable of taking over the loan balance and making the mortgage payments on the original loan.
Selling a Home to a Non Veteran Buyer
If you’re a home seller and allowing the loan to assume, the impact will be different if the buyer is a non veteran compared to a veteran. Since a veteran buyer has their own VA loan entitlement, they will typically request a VA assumption by substitution – that is, during the loan assumption process, that veteran buyer will substitute their own VA eligibility for the seller’s eligibility. This frees up the seller’s eligibility and gives them back their entitlement allowing them to purchase another home using their VA entitlement at a later date if they choose.
In order for the seller’s full eligibility to be restored, the seller will need to work with the servicer and the VA to obtain a release of liability for the assumed loan. This ensures that the seller will not be liable in the event the buyer defaults on the assumed mortgage, and that the seller has access to their full VA loan benefits going forward. The seller will typically complete VA form 26-6381 which formally requests their release of liability and restoration of VA entitlement, and submit this to the servicer as part of the loan assumption process.
However, if the home buyer is a non veteran, they of course won’t have any VA entitlement of their own – so when they assume the existing loan, they’re also effectively assuming the entitlement of the eligible veteran who currently owns the home.
For the seller, this means that a portion (or potentially all) of their VA loan entitlement will continue to be tied up in the property until the buyer refinances into another loan product (e.g conventional loan) or sells the home. The seller may still be able to use any remaining VA loan entitlement to purchase another property, but depending on the amount of entitlement that is tied to their existing home, they may need to plan for a down payment on their next property in order to qualify.
For this reason, if you intend to buy another home after allowing your existing VA loan to be assumed, it’s important that you talk with your lender and real estate agent about the implications of an assumable loan on your next purchase. Be sure that you’ll have sufficient VA loan entitlement remaining after the assumption, so that you can still meet your goals for buying your next property.
Property Taxes for Non Veteran Home Buyers
In many states, veteran homeowners who receive 100% permanent and total disability compensation from the VA based on a service related disability qualify to be exempt from some or all of their real estate property taxes. If a non veteran assumes a VA home loan from a veteran with this exemption in place, the non veteran buyer will likely not be eligible for this same property tax benefit. This is because the property tax exemption is tied to the individual on the deed – and the name on the deed is updated to the new owner during the assumption process.
As a non veteran homebuyer, if you complete a VA loan assumption from a veteran with a service related disability, you’ll want to speak with the servicer about how you’ll pay your property taxes after closing. Some states may require you to escrow those funds – i.e. to pay those funds directly to the lender, who will disburse them on your behalf at tax time – while others may permit you to pay your property tax bill separate from the VA mortgage.
Is a VA Loan Assumption Right for You?
A VA loan assumption is a great option to potentially reduce your mortgage payment by hundreds or thousands of dollars each month. Many homes with VA loans currently have 30 year fixed interest rates that are far lower than the rates for a new mortgage – so a VA loan assumption could allow you to achieve one of these rock bottom rates. Because the process is time consuming, talk to your real estate agent and to the seller of the property to be sure it’s a good option for everyone involved before making an offer. Both veterans and non-veterans alike can benefit from a VA loan assumption depending on the circumstances.
