Let’s talk about working with clients, both buyers and sellers, who have the option of a VA assumable loan transaction. We’ll dig into the process as well as the advantages and disadvantages of this. Loan assumptions and traditional home purchases differ in a few key ways.
First off, what is a VA loan assumption?
- Homes listed for sale on the MLS will include the line “VA loan assumption” if this is something that the seller is willing to consider as one of the financing options for potential buyers.
- That means that the current mortgage attached to the property for sale was financed with a VA loan and the seller is willing to offer it as an assumable loan to potential buyers.
- The assumable loan is an agreement between the VA (as the lender), the original borrower (the seller), and the new borrower (the buyer).
- Anyone can assume a VA loan if they meet the lender’s requirements. They do not need to be a veteran.
- The buyer takes over the seller’s mortgage, outstanding balance and interest rate, but still needs to pay the seller the remaining cost of the home.
What are the requirements for assuming a VA loan?
- Lenders typically have requirements such as minimum credit score and income levels. The buyer must provide proof of income to demonstrate their ability to make the ongoing mortgage payments.
What are the fees for assuming a VA loan?
- The funding fee for a VA loan assumption is 0.5%.
- Lenders can also charge a fee up to $300 plus the cost of a credit report.
What are the risks?
After the seller and buyer complete the loan assumption process, the homeowner needs to ask and obtain a Release of Liability. This is very important. If the buyer who assumed the loan later makes late payments or defaults on the loan, this could negatively effect the original seller’s credit if they did not receive the Release of Liability. There is also a risk of losing the seller’s original VA loan entitlement if the buyer who assumes their loan later defaults.
How does the VA loan entitlement play into this equation?
If the person assuming your loan is a veteran with sufficient VA loan entitlement, then you can ask them to substitute your entitlement for theirs. Otherwise, the entitlement that you used to purchase that home stays tied up in that property until the loan is fully repaid. Failing to get a Substitution of Entitlement can limit your $0 down payment buying power when it comes to purchasing a new home.
What are the advantages?
The buyer gets to take advantage of the lower interest rate that you locked when you bought the property originally. Also, most of the closing costs associated with closing on a home aren’t part of the assumption either. The buyer who assumes that loan does however have a 0.5% funding fee. That fee goes directly to the VA to maintain the program for future buyers.
Legal Advice
A real estate attorney can help a seller ensure they are not liable for a VA loan after it is assumed. This is especially important when selling a home with an assumable loan, which can be a complex process. If you need referrals for a real estate attorney, reach out to me. I am happy to provide you with a few contacts to discuss your VA loan assumption circumstances.
If you are looking for more information, the Arizona REALTORS® discusses loan assumptions in more detail here:
For more information on VA loans and their process, go to: https://www.va.gov/housing-assistance/home-loans/
Or talk to your respected lender. If you don’t have a lender in mind, reach out to me and I will be happy to refer you to a loan officer with experience in VA home loans.