The Department of Veterans Affairs (VA) recently released Circular 26-23-27, which has significantly impacted the VA loan assumption process. This circular addresses the issue of non-compliance among lenders and servicers, mandating that they must process VA loan assumptions within a 45-day timeline.
This new guidance has changed the landscape of VA loan assumptions, which previously could take up to 4-6 months to gain approval. The VA’s decisive action aims to ensure that the assumption process is more efficient and streamlined for Veterans and homebuyers.
The Challenges of VA Loan Assumptions
Loan servicers, the entities responsible for processing VA loan assumptions, have historically lacked the incentive to dedicate adequate resources to handle the volume of assumption requests efficiently.
Limited Financial Incentive for Servicers
Until May 2024, servicers were only permitted to charge an assumption processing fee not exceeding $300, as per VA regulations. This low financial incentive has led many servicers to prioritize other aspects of their business, leaving assumption applications in the backlog. As a result the VA has updated their policy to allow a locality variance that ranges from $386 to $463 depending on region, which is in addition to the $300 base processing fee.
Understaffing and Backlog Management
The combination of limited financial incentive and understaffing has resulted in extended processing times, often reaching 90-120 days on average. This has been a significant pain point for Veterans and homebuyers seeking to take advantage of the benefits of VA loan assumptions.
VA Loan Assumptions: A Guaranteed Benefit
It’s crucial to understand that the ability to assume a VA mortgage is a government-guaranteed entitlement. The VA ensures that all VA loans are assumable, and this right cannot be overridden by a servicer’s willingness or capacity to process assumption requests.
Servicers Must Process Assumptions
Contrary to popular belief, servicers do not have the discretion to choose whether or not to approve a VA assumption. Federal law mandates that all lenders servicing VA loans must process assumptions when requested, provided that the buyer meets the necessary financial underwriting requirements.
Underwriting Requirements for Assuming Buyers
To qualify for a VA loan assumption, the assuming buyer must meet the lender’s creditworthiness standards, which typically include:
- Credit score evaluation
- Income verification
- Debt-to-income ratio assessment
VA Takes Action: Circular 26-23-27
Recognizing the challenges faced by Veterans and homebuyers in the VA loan assumption process, the VA issued Circular 26-23-27 on December 20, 2023.
Reminder of Obligation
This circular serves as a stern reminder to holders and servicers of their obligation to process VA loan assumptions in accordance with VA’s guidelines. It emphasizes the importance of timely processing and the consequences of non-compliance.
Consequences of Non-Compliance
The circular outlines the consequences of non-compliance, including the VA’s refusal to pay any guarantee claim on the affected loan(s). This measure aims to hold servicers accountable and ensure that they prioritize the processing of VA loan assumptions.
VA’s Steps for Non-Compliance
- Notify servicer of non-compliance and direct them to rectify the issue promptly
- If servicer fails to comply within seven calendar days or their inaction may cause irreparable harm to the Veteran, VA will:
- Insert a notation in the loan file, asserting a defense against liability
- Notify GNMA that the guaranty payable on the loan has been effectively reduced to $0
Repeated Non-Compliance Measures
Repeated non-compliance with VA’s loan assumption requirements may subject servicers to additional measures, such as:
- Increased examination and audits
- Referral to VA’s Office of Inspector General for investigation
- Various penalties associated with false claims and program fraud
- Public notification of the servicer’s repeated, willful non-compliance
These measures demonstrate the VA’s commitment to ensuring that servicers adhere to the guidelines and process VA loan assumptions in a timely and efficient manner.
The Impact of VA Circular 26-23-27
The issuance of VA Circular 26-23-27 has had a profound impact on the VA loan assumption landscape, leading to significant improvements in processing times and overall efficiency.
Reduced Processing Times
By holding servicers accountable and mandating adherence to strict processing timelines, the VA has significantly reduced the time allowed to approve VA loan assumptions.
- Previous average: 90-120 days
- New mandate: 45 days
This reduction in processing times has been a welcome relief for Veterans and homebuyers who have long been frustrated by the lengthy wait times associated with VA loan assumptions.
Commitment to Veterans and Homebuyers
The improvement in processing times is a direct result of the VA’s unwavering commitment to ensuring that Veterans and homebuyers can fully exercise their entitlement to assume VA loans. By eliminating the ambiguity surrounding servicers’ obligations and establishing clear consequences for non-compliance, the VA has created a more efficient and streamlined assumption process that benefits all parties involved.
VA Loan Assumption Guidelines
When considering a VA loan assumption, it’s essential to be aware of the key guidelines and requirements:
- On-time Payments: The VA requires that the loan being assumed must be current before the assumption can be approved. The VA does allow the loan to become current prior to settlement (or as part of the settlement proceedings) as long as the loan becomes current prior to buyer/seller transfer.
- Financial Review: The assuming buyer must meet the lender’s creditworthiness standards, which typically include a review of their credit score, income, and debt-to-income ratio.
- Funding Fee: While the funding fee for a new VA loan ranges from 1.25% to 3.3% of the loan amount, the funding fee for an assumption is significantly lower at only 0.5%. Some buyers, such as Veterans with service-connected disabilities, may be exempt from paying the funding fee altogether.
- Liability Release: Sellers who hold VA loans must apply for and obtain a release of liability from the VA. This crucial step protects the seller’s credit in the event that the assuming buyer defaults on the loan in the future.
AssumeList: Your Partner in VA Loan Assumptions
Navigating the VA loan assumption process can be complex, particularly given the recent changes in regulations and processing timelines. That’s where AssumeList comes in. As a leading provider of information and resources related to assumable mortgages, AssumeList is dedicated to helping homebuyers, sellers, and real estate agents understand and benefit from the power of VA loan assumptions.
Guidance and Support
If you have any questions about loan assumption timelines, approval processes, or how to find homes with assumable VA loans in your area, don’t hesitate to reach out to our knowledgeable team at AssumeList. We’re here to guide you through every step of the process and ensure that you can take full advantage of the opportunities presented by VA loan assumptions in today’s market.
Frequently Asked Questions (FAQ)
Why do loan servicers often fail to hire adequate staff to process VA loan assumptions?
Loan servicers are only allowed to charge an assumption processing fee of up to $300 plus locality variance, which provides little financial incentive for them to invest in sufficient staffing to handle the backlog of assumption requests. However, VA Circular 26-23-27 mandates that servicers approve assumptions within 45 days, regardless of their staffing levels or financial incentives.
Is the ability to assume a VA loan guaranteed?
Yes, the Department of Veterans Affairs guarantees that all VA loans are assumable. The ability to assume a VA mortgage is a government-entitled benefit that cannot be overridden by a servicer’s willingness or ability to process assumption requests. Federal law requires all lenders who service VA loans to process assumptions when requested, as long as the buyer meets the financial underwriting requirements.
Can a loan servicer choose not to approve a VA loan assumption?
No, there is a common misconception that loan servicers can choose whether or not to approve a VA loan assumption. This is inaccurate. As long as the assuming buyer meets the financial underwriting requirements, servicers have no ability to prevent an assumption from being processed.
How has VA Circular 26-23-27 impacted the timeline for VA loan assumption approvals?
VA Circular 26-23-27 has significantly reduced the time it takes for VA loan assumptions to be approved. Prior to the circular, the average loan assumption approval timeline was 90-120 days. Now, the mandated approval timeline has been reduced to just 45 days.
What are the financial underwriting requirements for assuming a VA loan?
To assume a VA loan, the buyer must meet the lender’s creditworthiness standards, which typically include a review of their credit score, income, and debt-to-income ratio. The specific requirements may vary depending on the lender, but the VA ensures that all buyers who meet these standards are eligible to assume a VA loan.
The Bottom Line
VA Circular 26-23-27 has revolutionized VA loan assumptions, making the process faster and more transparent. The VA’s commitment to reducing processing times and holding servicers accountable ensures that Veterans and homebuyers can benefit from assumable VA loans.
As interest rates rise, VA loan assumptions offer an excellent opportunity for homebuyers to secure affordable mortgages and for sellers to attract more buyers. Now is the perfect time to explore the benefits of VA loan assumptions with the support of knowledgeable partners like AssumeList.
