Assuming a VA loan can be an attractive option for both homebuyers and sellers. With the flexibility and benefits it offers, it’s no wonder why many homebuyers choose this route when it comes to homeownership. In this article, we will explore the concept of VA assumable loans, how they work, and the advantages they bring to the table.
What is a VA Assumable Loan?
A VA assumable loan is a type of mortgage loan that allows a qualified buyer to take over the existing mortgage of a VA loan held by a veteran or other eligible VA borrower. In essence, it means that the buyer assumes the remaining balance of the loan along with its terms and conditions, including the interest rate. This can be a huge advantage for both the buyer and the seller.
To assume a VA loan, the new buyer does not need to be a veteran and therefore doesn’t need to have VA entitlement; however, having VA entitlement makes the process easier as it allows the buyer to substitute his entitlement for that of the sellers.
The value in pursuing a VA loan assumption is the potentially massive savings in your monthly mortgage payments. While new loan interest rates are currently topping 7%, buyers can take advantage of assumable mortgages from existing VA loans and obtain an interest rate under 3%! This benefit can translate into thousands of dollars of savings every year on your mortgage payments.
How Does a VA Assumable Loan Work?
When a homebuyer assumes a VA loan, they step into the shoes of the original VA borrower. This means that they become responsible for making the remaining loan payments, while also enjoying the terms and benefits that come with the original loan. These benefits can include lower interest rates and more lenient credit requirements. In addition, the standard VA funding fee is not applicable as the VA only charges a nominal 0.50% assumption fee for any loan assumption.
To assume a VA loan, the buyer needs to meet certain eligibility criteria, including:
- VA Loan Entitlement: As mentioned, the buyer is not required to be a veteran or have VA loan entitlement to obtain a VA assumable mortgage. However, if the buyer is a veteran and chooses to substitute his entitlement with that of the seller’s, the buyer must have sufficient VA loan entitlement available. To determine if you have sufficient entitlement available, any VA approved lender can assist you, as can the seller’s existing mortgage servicer.
- Creditworthiness: The buyer must meet the lender’s credit and income requirements. The best way to learn what these are is to contact the seller’s lender since every lender has slight variations in how they process a VA loan assumption.
- Occupancy: The buyer must intend to occupy the property as their primary residence.
- Approval: The lender must approve the assumption. All buyers of assumable VA loans must be approved by the seller’s lender to assume the existing VA loan. This can be a lengthy process which can take anywhere from 45 days to more than 120 days depending on the bank involved. Neither interest rate, original loan amount, or remaining loan balance has any any impact regarding VA loan eligibility or approval.
Advantages of a VA Assumable Loan for Homebuyers
Assuming a VA loan can offer several benefits to homebuyers, making it an attractive option for those who qualify. Some of the advantages include:
- Lower Interest Rates: VA loans often come with lower interest rates compared to other loan types, which can result in significant long-term savings for the buyer.
- Less Stringent Credit Requirements: VA loans typically have more lenient credit requirements, making it easier for buyers with less-than-perfect credit to qualify.
- Avoidance of Mortgage Insurance: VA loans generally do not require mortgage insurance, which can save homebuyers hundreds of dollars each month.
- Assumption Fees: Assuming a VA loan may involve fees, but they are often lower compared to the costs associated with obtaining a new mortgage. For example, the VA funding fee is eliminated, replaced by a much lower VA assumption fee (calculated at 0.50% of the remaining loan balance). The Department of Veterans Affairs requires this fee for all VA loan assumptions; however, this fee is waived for any buyer exempt from paying a funding fee (e.g. disabled veterans).
- Transfer of Benefits: Sellers can transfer their VA loan benefits to the buyer, including the eligibility for future loan assumptions.
|If your down payment is…||Your VA funding fee will be…|
|First use||Less than 5%||2.15%|
|5% or more||1.50%|
|10% or more||1.25%|
|After first use||Less than 5%||3.30%|
|5% or more||1.50%|
|10% or more||1.25%|