With interest rates rising, did you know that you could save hundreds on your monthly mortgage payments when you assume a VA mortgage loan? Let’s dive into the benefits of a VA loan assumption and how you can get a super low rate in the process.
Benefits of a VA Loan Assumption
Saving Thousands with a Better Interest Rate
As a home buyer, when you assume a VA mortgage loan, you basically take over the existing loan balance from the seller – including the current interest rate. This benefit can make a huge difference in your monthly mortgage payment depending on how high prevailing rates are for obtaining a new loan.
For example, a $500,000 home with a 20% down payment and a 7% rate would have a principal and interest payment of about $2660/month. But that same home, with a 2.75% rate, would have a monthly payment of only $1632/month. That’s more than a $1000/month savings and over $12,000 per year! Who doesn’t want a $12,000 a year pay raise!
It would be nearly impossible to obtain this low a rate in the current market. It’s unlikely that we’ll see interest rates return to sub-5% levels anytime in the near future – and perhaps never again in our lifetimes. Even if you “buy down” your rate on a new loan, it’s likely to be prohibitively expensive to obtain a rate that’s several percentage points lower. When you assume a VA home loan, you don’t incur any fees tied to the rate – you simply take over the homeowner’s rate.
There’s also no mortgage insurance required for VA loans, so you won’t have any extra fees wrapped into your monthly payment even if you’re putting less than 20% down.
Anyone is Eligible to Assume a VA Loan
You don’t have to be a veteran in order to assume a VA mortgage – even non veterans are eligible! Though there are military service requirements in order to get a new VA loan, almost anyone can qualify to assume a VA loan, even if they’re not a veteran.
When assuming a VA loan, the buyer still has to be able to qualify for a mortgage and will be vetted by the seller’s lender to ensure they meet income requirements, and that they have a good debt to income ratio, the required down payment and a decent credit report. But beyond these financial requirements, and the assumption getting approved by the VA, there are no additional hurdles for non veterans to take over an existing VA loan.
Investment Properties are Fair Game
In most cases, you can only get a VA loan for a primary residence. However, if you are a non veteran buyer, you can purchase a home and assume a VA loan for an investment property! This could make a big difference in the monthly cash flow if the home is going to be a rental property.
Unfortunately, this stipulation does not apply to veteran home buyers who want to assume a VA loan by substituting their own eligibility. Because they are using their eligibility, they are still tied to the requirement that the home be used as a primary residence and that they occupy the home within 60 days of purchasing it.
Reduced Closing Costs
When you assume a VA loan, the closing costs are slightly less than when you take out a new loan.
For example, when you take out a new VA home loan, you have to pay a funding fee (which is charged by the VA) in order to originate your loan. The funding fee can be paid with your closing costs, or you can roll it into the loan. The VA funding fee ranges from 1.25% to 3.3% depending on the amount of your down payment and the number of times you’ve used your entitlement.
But when assuming a VA loan, the VA funding fee is only 0.5%. There are still certain circumstances where the funding fee may be waived altogether, such as when the buyer is also a veteran and has a service-connected disability.
In addition, since you’re not taking out a new mortgage loan, you won’t have to pay any loan origination fees, which are often about 1% of the loan amount. You may still have to pay a nominal processing fee to the lender for their work on the assumption – however, you would still have to pay a processing fee when obtaining a new loan, so this is not an added cost.
An Easier Home Sale
A VA loan assumption also offers benefits for a home seller – imagine being able to market your home at a similar price as your competitor down the street, except with the added benefit that a buyer could assume your low interest rate and save a bundle. That’s a significant selling point!
If you decide to offer this benefit to potential buyers, make sure your real estate agent notes it in all of their marketing for the home and can properly educate potential buyers about the benefits of assumable VA loans.
Challenges of a VA Loan Assumption
Although a VA loan assumption offers significant benefits for buyers and sellers, there are some challenges to be aware of.
Long Lending Process
Closing on a VA loan assumption typically takes longer than originating a new loan. Part of this timeline is due to the fact that the loan assumption must be approved by the servicers underwriting department who is reviewing the assumption package along with the Department of Veterans’ Affairs. That said, the Dept of VA recently released a circular that directs the processing and approval for VA assumptions to be completed within 45 days.
As mentioned, the loan assumption must be approved by the institution that currently owns (or services) the loan – and since they’re not originating a new loan, they don’t make any money on that transaction. Without financial incentive, servicers often move as quickly as lenders who originate new loans. So if you’re buying or selling a home with a VA loan assumption, you should plan for a little more time to close than what would be required when taking out a new loan.
Potential for a Hefty Down Payment
When you assume a VA loan, you’re taking over the seller’s current loan and interest rate – which means that, if the seller has already paid down a large portion of their current mortgage, you may be required to make a significant down payment.
For example, if a homeowner purchased a home with a VA loan ten years ago at $600,000, and has since paid the loan amount down to $450,000, you’ll need to come up with that difference of $150,000 in order to assume the loan. This delta can be a considerable sum of money, so it’s important to understand the seller’s existing loan balance before embarking too far into the assumption process.
Tying Up Your VA Loan Entitlement
As a seller, if you allow a buyer to purchase your home and assume your VA home loan, and that buyer does NOT have their own VA eligibility, then a portion of your VA loan entitlement will remain with that property until the buyer eventually pays off the loan or sells the property. This may mean that you won’t have sufficient VA loan entitlement to purchase another property using a VA loan, depending on where and when you plan to buy your next place.
The easiest way to prevent this is to sell only to a home buyer who has their own VA loan entitlement – they can then do a VA loan assumption by substitution, which essentially means they’re swapping out your VA certificate for their own. Your VA entitlement is then completely freed up, allowing you to purchase your next property using your maximum eligibility.
However, this of course limits your pool of potential home buyers who can qualify to assume your VA home loan, so consider your plans carefully and decide if you can afford to have your eligibility tied up. Although offering your VA loan for assumption to a non veteran buyer is a tremendous selling point, it may not be worth it if it limits your ability to buy your next place. Talk to your lender about whether you’ll have enough VA eligibility left to purchase your next home, or if you can use a conventional or FHA loan for your purchase instead.
Requirements for Assuming a VA Loan
Here are the general requirements to assume a VA home loan and obtain the lender’s approval:
- You must have a 12-month history of on-time mortgage payments
- You must agree to assume all the liabilities associated with the loan
- You must have enough residual income
- You must pay 0.5% of the loan balance as the funding fee (unless you have a qualifying service related disability)
- You must satisfy the lender’s credit and income requirements
If you are selling a home with a VA loan, you’ll want to be sure to obtain a release of liability for the original loan before closing. A release of liability prevents you from incurring a significant credit hit in the event that the new buyer has any late payments or otherwise defaults on the assumed mortgage. You’ll need to apply for the release of liability with the Department of Veterans Affairs.
Here are the five steps for assuming a VA loan:
- Find out if the property is eligible for a VA loan assumption. Often, a seller will advertise in their home listing if the property has an assumable loan. However, even if they don’t mention it, it can be worth asking the seller or their real estate agent if they have a VA loan on the property that they’d be willing to let you assume. They may not have considered it and yet might be open to the possibility.
- Find out the seller’s current mortgage balance and interest rate. You need to determine if you have sufficient funds for the down payment on the assumed loan, so determining the amount of the seller’s existing mortgage is critical. Finding out the interest rate is also important, so that you can decide if the savings is significant enough to merit going through the VA assumption process, or if it makes more sense to just obtain a new loan.
- Make an offer on the home. You’ll want to include terms in your offer that specify your home purchase is contingent on assuming the existing VA loan.
- Submit any required paperwork to the lender. You’ll still have to qualify for the loan assumption just as you would have to qualify for a new loan, so be sure to submit all the needed paperwork to the lender. They’ll likely ask for proof of income, information about other debts and liens, and bank statements.
- Wait Patiently, and Assume Your VA Mortgage!
The Future of VA Loan Assumptions
Hundreds of thousands of VA eligible home buyers purchased properties in the last several years when interest rates were often below 3%. Although VA loan assumptions haven’t been especially popular in recent years, since prevailing interest rates have been at historic lows, they’re likely to become much more popular now in an environment of rising rates.
They’re also a fantastic opportunity for home buyers to save money, and a competitive way for home sellers to market their home in a buyer’s market. VA homeowners are uniquely positioned to sell their homes thanks to this unique benefit, and we encourage you to consider it as an option!
