ASSUMING A VA LOAN

The Complete Guide to Assuming a VA Loan

September 20, 2024 • 7 min read

Assuming a VA loan can be a smart financial move, but it's often overlooked by homebuyers. If you're in the market for a home and want to save money, this guide is for you. Whether you're a veteran, civilian, or even an investor, VA loans offer unique opportunities—especially when it comes to loan assumptions.

In this article, we’ll explore everything from how to assume a VA loan to understanding who can assume a VA loan.

What Is a VA Loan Assumption?

A VA loan assumption allows a buyer to take over the seller's existing VA loan, including the interest rate, balance, and terms. This process differs from securing a new loan—you’re stepping into the shoes of the original borrower. If the seller secured a lower interest rate, the buyer could potentially save thousands of dollars over the loan’s term.

However, not all VA loans are assumable. Loans made after March 1, 1988, require prior approval from the Department of Veterans Affairs (VA) or its authorized agent to ensure the buyer meets the necessary conditions. This is outlined in the loan agreement with a warning that states the loan cannot be assumed without the proper VA approval. Additionally, the lender has the right to declare the loan immediately due if the property is transferred without approval, under the due-on-sale clause.

In most cases, VA loans are assumable by both veterans and non-veterans, depending on lender approval.

How Does a VA Loan Assumption Work?

The VA loan assumption process includes several steps, but they can be straightforward when you follow the right guidelines:

  1. Verify Assumability: Make sure the loan is eligible to be assumed by checking the original loan documents or contacting the lender. Keep in mind that the loan must include a statement that mentions the need for VA approval.

  2. Buyer’s Financial Eligibility: The buyer must meet the lender's financial criteria, which typically includes a credit check, income verification, and debt-to-income ratio assessment. The VA also requires the buyer to demonstrate creditworthiness, similar to applying for a new VA loan.

  3. VA Funding Fee: The person assuming the loan must pay a VA funding fee of 0.5% of the loan balance, which is due within 15 days of assuming the loan. There may also be a small processing fee up to $300, plus the cost of a credit report.

  4. Contact the Lender: Both the buyer and seller should notify the lender about their intent to transfer the loan. The lender will guide the process and review the buyer's qualifications.

  5. VA Approval: If the buyer is a veteran, they must have their VA entitlement restored. Non-veterans can assume the loan, but the seller’s VA entitlement will remain tied to the property until the loan is paid off.

  6. Close the Deal: Once everything is approved, the buyer takes over the loan, including the remaining balance, interest rate, and terms. If the sale price exceeds the loan balance, the buyer must cover the difference with a down payment.

How to Find Assumable VA Loans

If you're ready to assume a VA loan, the first step is finding a property with an assumable VA loan. Keep in mind, finding these deals can be challenging since they aren't always widely advertised.

Here’s how:

  1. Assumable VA Loans Listings: Start by searching through assumable VA loan homes for sale. Some real estate websites specifically list homes with assumable loans. Working with an agent who understands how to find VA assumable loans can make a big difference.

  2. Work with a Real Estate Agent: A real estate agent with access to the Multiple Listing Service (MLS) can help you find homes with VA loans that are assumable. They can filter listings to include only those with assumable mortgages.

  3. Check VA Loan Websites: Some specialized websites and resources are dedicated to listing assumable VA loans. These are great resources to explore if you're looking for homes with assumable mortgages in your area.

Who Can Assume a VA Loan?

A VA loan can be assumed by different types of buyers, including veterans, civilians, and even some investors. However, there are specific rules for each group. Here’s what you need to know:

Veterans

Veterans are the easiest candidates to assume a VA loan. If a veteran buyer takes over the loan, they can use their own VA loan entitlement, allowing the seller to regain theirs. This is important because it frees up the seller’s eligibility to get another VA loan for a future home. Veterans who assume a loan can also benefit from the seller’s lower interest rates and better loan terms without having to go through the full process of applying for a new loan.

Non-Veterans (Civilians)

Civilians can also assume a VA loan, but the process is a little different. When a non-veteran assumes the loan, they get the same terms, like lower interest rates, but they cannot substitute their entitlement for the seller’s. This means the seller’s VA entitlement stays connected to the property until the loan is paid off. For the seller, this could limit their ability to use their VA benefits for a future purchase. For non-veterans, assuming a VA loan can still be a great way to get a lower rate and better terms, as long as they meet the lender’s financial requirements.

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How Long Does It Take to Assume a VA Loan?

On average, the entire process can take anywhere from 30 to 60 days. The timeline largely depends on how quickly the buyer is approved and how efficiently the lender processes the necessary paperwork. If the buyer’s financial situation is in order and the loan is assumable, the process can move relatively quickly.

Benefits of Assuming a VA Loan

There are numerous advantages to assuming a VA loan:

  1. Lower Interest Rates: Buyers can lock in the seller’s interest rate, which can be significantly lower than current market rates.

  2. No Private Mortgage Insurance (PMI): Assumable VA loans typically don’t require PMI, saving the buyer additional costs.

  3. Reduced Closing Costs: Since the buyer is taking over an existing loan, they’ll often pay lower closing costs compared to securing a new loan.

  4. Faster Closing Process: Since the loan already exists, the closing process can be quicker than starting a new mortgage application.

Drawbacks and Considerations When Assuming a VA Home Loan

While assuming a VA home loan can be a great opportunity, there are a few things to watch out for. Finding homes with assumable VA loans isn’t always easy, and there are some important details to consider before moving forward:

  1. Entitlement Restoration: For sellers, their VA loan entitlement will remain tied to the loan unless another veteran assumes it. This can limit their ability to use their VA benefits for future home purchases, as the entitlement won’t be restored until the loan is paid off.

  2. Down Payment: If the home’s sale price is higher than the remaining loan balance, the buyer will have to cover the difference with a down payment. This can make the upfront costs more challenging, depending on how much equity the seller has built.

  3. Lender Approval: Not all lenders allow VA loan assumptions, and even when they do, buyers must still meet certain financial requirements, such as credit score and income verification. It’s not a guaranteed process, so buyers need to be prepared to meet the lender's standards.

  4. Release of Liability: Sellers should always request a release of liability from the lender. Without it, the seller could still be held responsible if the buyer defaults on the loan in the future, putting them at financial risk.

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Step-by-Step Guide: How to Assume a VA Loan

Here’s a step-by-step guide on how to assume a VA loan:

  1. Find Assumable VA Loans: Use assumable VA loans listings, work with a real estate agent, or consult VA loan websites to locate assumable VA loan homes for sale.

  1. Check Assumability: Once you’ve found a home, confirm that the VA loan is assumable by checking the loan documents or contacting the lender.

  1. Prepare Financial Documents: Gather all necessary financial information, including your credit report, proof of income, and any other documentation required by the lender.

  1. Notify the Lender: Both the buyer and seller need to inform the lender that they intend to assume the loan. The lender will walk you through the application process.

  1. Submit Application: The buyer submits their loan assumption application, which includes a financial review.

  1. Lender and VA Approval: The lender will review the application and determine if the buyer is eligible to assume the loan. If applicable, the VA will need to restore the seller’s entitlement.

  1. Close the Deal: If approved, the buyer takes over the loan and any remaining balance. If the purchase price is higher than the remaining loan balance, the buyer will need to cover the difference as a down payment.

Assuming a VA Loan FAQ

What is the VA funding fee for loan assumptions?

The VA charges a 0.5% funding fee on the remaining loan balance for loan assumptions. This is significantly lower than the funding fee for new VA loans, which can go up to 3.6% for subsequent uses.

Are all VA loans assumable?

No, not all VA loans are assumable. You need to verify if the loan is eligible for assumption by reviewing the original loan documents or checking with the lender.

How does VA entitlement work in a loan assumption?

When a veteran sells a home with a VA loan, their entitlement remains tied to the property unless the buyer is another veteran who substitutes their entitlement. If the buyer is not a veteran, the seller’s entitlement will not be restored until the loan is fully paid off.

Can an investor assume a VA loan?

No, VA loans are intended for primary residences only, so they cannot be assumed for investment properties. However, an investor can assume a VA loan if they intend to live in the property as their primary residence.

Are VA loans assumable by non-veterans?

Yes, VA loans can be assumed by non-veterans. However, if a non-veteran assumes the loan, the original veteran seller’s VA entitlement remains tied to the property until the loan is repaid unless another veteran assumes the loan.

Can you assume a VA loan without being a veteran?

Yes, non-veterans can assume a VA loan, as long as they meet the lender’s credit and income qualifications.

How long does it take to assume a VA loan?

On average, the process takes 30 to 60 days, depending on how quickly the lender processes the application and the buyer meets the qualification criteria.

What are the requirements to assume a VA loan?

The buyer must meet the lender’s financial requirements, which include having a sufficient credit score, verifiable income, and an acceptable debt-to-income ratio. If the buyer is a veteran, the VA will also need to approve the transfer.

Can a civilian assume a VA loan?

Yes, civilians can assume a VA loan. However, the veteran seller’s entitlement will remain tied to the property until the loan is fully paid off.

How do assumable VA loans work?

Assumable VA loans allow a buyer to take over the seller's loan, including the interest rate, balance, and terms. The buyer effectively steps into the original borrower’s shoes, continuing the loan where the seller left off.

What does an assumable VA loan mean?

An assumable VA loan means a buyer can take over the seller’s VA loan with the same terms, such as the remaining balance, interest rate, and loan duration. This often allows the buyer to secure more favorable loan terms than they could with a new mortgage.

Are you able to assume a VA loan after death?

Yes, in some cases, a VA loan can be assumed after the borrower’s death. Surviving spouses or heirs may assume the loan if they meet the lender’s requirements. The process is similar to a standard loan assumption, but it’s essential to consult the lender and legal professionals to ensure eligibility.

How does a VA assumable loan work?

A VA assumable loan transfers the seller’s loan to a new buyer, allowing the buyer to take over the remaining balance, interest rate, and terms. The buyer must meet the lender’s financial criteria and, if applicable, the VA will approve the assumption to restore the seller’s VA entitlement. The process involves notifying the lender, submitting the necessary paperwork, and finalizing the loan assumption after approval.

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