VA Loan Assumption: What It Is, How It Works, and Eligibility
Key Takeaways
- An assumable mortgage lets you take over a seller’s existing home loan, including its interest rate and balance.
- While conventional mortgages aren’t typically assumable, government-insured loans are, including VA loans.
- You don’t have to be a Veteran or member of the U.S. military to assume a VA loan.
- Assuming an existing loan can save you money if it has a lower interest rate than current mortgage rates.
Instead of getting a new mortgage when buying a home, you might be able to take over the existing home loan from the property’s seller. This is known as assuming a mortgage, and when you do this, you inherit the interest rate, remaining balance and term of the home loan you are assuming. Not all mortgages are assumable, but VA loans, mortgages insured by the U.S. Department of Veterans Affairs (VA) usually are.
How can you assume an existing VA loan and what financial benefits can this move bring? Here’s a closer look at how the VA loan assumption process works.
What Is Loan Assumption?
When buying a home, you’d typically apply for a mortgage to finance the cost of the purchase. But with an assumable mortgage, you take over the mortgage that the home’s seller is already paying off.
Under this arrangement, you’ll assume the existing loan’s balance, interest rate and repayment schedule.
Say the home seller is paying off a 30-year fixed-rate mortgage of $300,000 with an interest rate of 4.5%. Say, too, that the seller has 20 years remaining on the mortgage and has paid it down to a balance of $200,000. By assuming this mortgage, the buyer’s interest rate would also be 4.5%, their loan balance would be $200,000 and they’d have 20 years of monthly payments to pay off the mortgage.
You don’t apply to your own lender when assuming an existing mortgage. Instead, the seller’s mortgage lender will check your credit score and your finances to make sure that you can qualify for the assumed monthly mortgage payment.
It’s important to note, too, that not all mortgages are assumable.
Are VA Loans Assumable?
VA loans are assumable. That differs from most conventional mortgages, loans not insured by a government agency, which are typically not assumable. Government-insured loans including both FHA and VA loans, though, were created to be assumable.
VA loans are exclusively for Veterans, active-duty service members, National Guard members, Reserve members, and eligible surviving spouses with a Certificate of Eligibility. But anyone can assume an existing VA loan. Once you assume the mortgage, it will remain a VA loan, even though you are not a Veteran or military service member.
Sellers should be aware that letting a buyer assume their VA loan does not automatically restore their VA entitlement. Instead, the seller’s entitlement will usually stay connected to the VA loan until the new buyer pays off that mortgage. The exception? If the buyer assuming the mortgage is an eligible Veteran or active-duty service member and agrees to substitute his or her entitlement.
How VA Loan Assumption Works
Assuming a VA loan requires a few extra steps than applying for a new mortgage. You’ll also need to meet the servicing lender requirements of the assumed mortgage.
Here’s a quick look at how the process might work:
- Contact the loan servicer: The best way to find a home seller with an assumable VA loan is to work with a real estate agent. Once that agent finds properties with potential assumable loans, you and your agent can contact the seller and engage interest in assuming their mortgage.
- Apply for the assumption: Just as if you were applying for a new mortgage, you’ll need to fill out an application with the company servicing the loan. You’ll need to provide information such as your full name, Social Security number, current address and your employer. You’ll also need to provide copies of documents showing your income and debts.
- Complete the qualification review: The company servicing the loan will usually want to see copies of your two most recent paycheck stubs, two months of bank account statements, last two years of federal income tax returns and last two years of W-2 forms. The lender will use this information to determine if you can afford the monthly payment that comes with assuming the VA loan.
- Receive approval: Within 45 days of receiving your underwriting package, the lender must notify you and the seller whether it approves or rejects your assumption application. If the lender rejects your bid to assume a VA loan, you and the seller have 30 days to appeal with the Department of Veterans Affairs. The department then has 10 business days to accept or reject the appeal.
- Pay applicable costs: Even though you are assuming an existing mortgage, you’ll still need to pay some closing costs, the fees charged by your lender and other third-party providers. These vary by lender but are typically much lower than if you were applying for a new mortgage. You’ll also need to pay the VA funding fee. When assuming a mortgage, this fee comes to 0.5% of the remaining principal balance of the loan. If you are assuming a mortgage with a remaining balance of $200,000, you’d pay a VA funding fee of $1,000.
- Complete the assumption: If the servicer approves your application, you can close the assumption. Once you finish signing the paperwork, you’ll take over the payments, interest rate and terms of the VA loan you are assuming.
Be aware that every lender is different. The costs you pay, the documents you need to prove your income and qualifying credit score may vary by lender.
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VA Loan Assumption Eligibility
You don’t have to be a Veteran, active-duty member of the U.S. Armed Forces or otherwise eligible for a VA loan to assume a VA loan. This doesn’t mean that everyone can qualify for an assumption. You will need to meet VA loan eligibility requirements, including having a strong enough credit score and income.
It’s important, too, for sellers to understand how a VA loan assumption can affect their VA entitlement and how a substitution of entitlement can restore their full VA loan benefit. Sellers should also request a release of liability that will protect them in case the buyers who assume their VA loan stop making their payments.
Buyer Requirements for VA Loan Eligibility
When assuming a VA loan, you’ll need to meet the same basic financial requirements that the lender would require of any homebuyer applying for a new VA loan. This includes:
- Credit score: This varies by lender. Freedom Mortgage's minimum risk score for a VA purchase or refinance transaction is 550, though other lenders may set a different minimum.
- Debt: Many lenders use a debt-to-income ratio around 41% as a general guideline, meaning that a borrower's new mortgage payment; student, personal and auto loan payments; and minimum monthly credit card payment total no more than 41% of their gross monthly income. Actual DTI limits vary by lender and loan file, and some borrowers may qualify at a higher ratio depending on residual income and other compensating factors.
- Income: Lenders will verify your monthly income to make sure that you can afford your new mortgage payment. Lenders usually require, too, that you have enough savings after paying for your down payment and closing costs to cover at least two months of mortgage payments.
Seller Requirements for VA Loan Eligibility
Sellers must be up to date on their mortgage payments before their lenders will approve a VA loan assumption.
It’s important, too, for sellers to obtain and sign a written release of liability from their loan servicer or the VA.
Sellers need to be aware, too, of how a VA loan assumption can affect their VA entitlement. If the buyer assuming your loan is not a Veteran, active-duty service member or otherwise eligible for a VA loan, your VA entitlement remains tied to the assumed loan. Until that loan is paid off, you won’t be able to use that portion of your VA benefit to apply for another VA loan.
This doesn’t apply if a Veteran, military service member or other buyer with a VA entitlement assumes your loan. That buyer can agree to substitute his or her own VA entitlement for yours. If this happens, your own VA entitlement is restored, and you can again apply for a VA loan with full entitlement.
Is It a Good Idea to Assume a VA Loan?
Assuming a VA loan can make financial sense depending on the loan terms, interest rate and remaining balance. If you can assume a VA loan with a better than market interest rate when you’d otherwise only qualify for a mortgage with a higher rate, assuming that VA loan might be a good idea. This could leave you with lower monthly payments during the life of the loan.
VA Home Loan Assumption Pros
There are several advantages to assuming a VA loan, including:
- When you assume a VA loan, you keep its interest rate. This can be a big financial benefit if current mortgage interest rates are significantly higher.
- If your loan does come with a lower (than current market) interest rate, you’ll end up with lower monthly principal and interest payments than if you took out a new VA loan.
- You will eliminate certain closing costs when assuming a VA loan instead of applying for a new loan. You might not pay for an appraisal or a loan origination fee. The VA funding fee is also significantly reduced compared to the fee you’d pay if you applied for a new VA loan.
- When you assume a VA loan, that loan remains assumable. That could help you attract more buyers if you want to sell your home before paying off your loan.
It’s important to remember that while assuming a VA loan does come with several benefits, it is not a guarantee that you’ll save money.
VA Home Loan Assumption Cons
As with all mortgage options, there are some downsides that come with assuming a VA loan.
- When you assume a VA loan, that mortgage only covers the remaining unpaid balance. If the home you are buying increased in value, the seller might now have more equity in the property, the difference between what the seller owes on the mortgage and what the home is worth. Say the loan you are assuming has a balance of $250,000 but the home you are buying is worth $350,000. You would need to pay $100,000 to the seller at closing. You can pay that in cash or by taking out a secondary loan to cover the balance. If the equity is too high, it might make a VA loan assumption too much of a financial hurdle.
- Assuming a loan can be a lengthy process. You will need approval from the lender servicing the seller’s loan.
- While it’s usually less expensive than applying for a new loan, assuming a VA loan isn’t free. You’ll still need to pay certain closing costs.
- If you are selling, your VA entitlement might remain tied to the loan that your buyer is assuming, meaning that you won’t be able to tap your VA benefits to take out another VA loan until the buyers pay off the assumed loan. You can avoid this if a Veteran or military service member buys your home and agrees to substitute his or her entitlement for yours or if your servicer or the VA, if the servicer is unable or unwilling, can help you secure a release of liability.
- Assuming a loan doesn’t automatically leave you with better terms. You might qualify for a lower interest rate and better terms by applying for a new loan on your own.
Deciding if assuming a VA loan makes sense for you? Consider both the immediate costs and long-term savings before making your choice.
Final Thoughts: VA Loan Assumption
Assuming a VA loan isn’t the simplest of processes. But there are times when taking over an existing VA loan can save you money and allow you to benefit from a lower interest rate. Make sure to consider all your options, including applying for a new mortgage, before agreeing to an assumption. If you are ready to apply for a loan, contact us. We can help you determine which loan options are a fit for you.
A graduate of the Journalism department at the University of Illinois at Urbana-Champaign, Dan Rafter has written about mortgage lending, credit scores, insurance, real estate, and personal finance topics for more than 30 years. During this time, he’s written for publications, such as the Washington Post, Chicago Tribune, Phoenix Magazine, Mental Floss Magazine, Grit, and many others. His stories have also appeared on Bankrate.com, CreditCards.com, and WiseBread.com, among others.
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