Assuming a Mortgage with a VA Loan When You Buy or Sell
If you’re a military veteran or spouse eligible for a VA loan, there are numerous reasons to take advantage of this program when you buy a home. For starters, VA loans may not require you to make a down payment, or pay private mortgage insurance. VA loans also come with credit requirements that make it easier to qualify, and closing costs may be lower than costs for closing on a traditional home loan.
Still, there’s another VA loan benefit that is less celebrated and understood. VA loans are “assumable” — meaning that when you sell, you might be able to pass along the terms of the mortgage even if the person buying the home isn’t a veteran. This could help both the buyer and seller.
In this guide, we’ll detail what assuming a mortgage with a VA loan means on both the buying and the selling end, the pros and cons of such a transaction and how to decide if this option is right for you.
What does it mean to assume a VA loan?
Generally, when somebody buys a house, they take out a brand new mortgage to cover the purchase price. With a VA loan assumption, the purchaser of the property doesn’t apply for their own mortgage; instead, they take over the liability of the existing VA loan from the seller.
This means they take over the home loan exactly where the seller left it, including the years remaining, the interest rate and the monthly payment.
What assuming a VA loan means for the buyer
Even if you are not a qualifying veteran eligible for a VA loan yourself, you may be able to assume a VA loan if you buy a home from a veteran. To do so, you will need to be approved by a VA lender and considered creditworthy.
While the VA itself doesn’t enact specific credit requirements, independent lenders who offer VA loans do typically have some basic requirements. This can include at least 12 months of an on-time payment history. Many lenders also require a debt-to-income ratio less than 41%, meaning that your mortgage and other debt expenses don’t make up more than 41% of your gross income. Finally, VA lenders have cash flow requirements that state you must have money left over after all your bills and expenses are paid each month.
As a buyer assuming a VA loan, you are required to pay a 0.05% funding fee directly to the VA when closing on the home. The fee must be paid to the VA within 15 days of the assumption through a special system known as VA FFPS.
If you are buying a home from a veteran and you are also a qualified veteran or spouse, the process is slightly different — and a bit simpler. You basically just sub in your own VA loan benefit for the home seller’s.
You would still have to meet income and credit requirements to qualify for the home loan either way, however. But you may not be required to pay the 0.05% VA funding fee, depending on your status. For example, you may be exempt from the funding fee if you are:
- A veteran receiving compensation for a disability that resulted from service
- A veteran who is entitled to receive compensation
- A veteran who could receive compensation due to a pre-discharge disability
- A surviving spouse of a veteran who died in service or a veteran with a service-related disability
What assuming a VA loan means for the seller
To pass on your VA loan as a seller, you have to meet certain conditions outlined by the VA. For example, your loan must be current — with no late payments — or be brought current through the sale of the home. You also have to find a buyer who is qualified to assume the VA loan. Sellers are also generally required to pay a processing fee between $250 and $300 (the price can vary by state) plus the cost of a credit report to account for the the cost of changing the loan records. This fee is usually collected in advance.
In some cases, the lender who originated the VA loan or the servicer collecting payments has to sign off on the transfer, too. Once the seller has checked on this and the buyer has formally submitted their information and application for the assumption of the mortgage, the VA has 14 days to complete its underwriting requirements.
In some cases, a veteran may allow a buyer to assume their VA loan and still be able to get another VA loan in the future. This is possible when the VA loan is assumed by another veteran. According to the VA, a veteran can request approval for the transfer of ownership of their home and home loan and may also request to have their VA loan entitlement restored so they can use it to purchase another home.
The bottom line: The most important factor to consider when you let another person assume your VA loan is whether or not the buyer is a veteran with their own VA loan entitlement. If you allow someone to assume your mortgage who does not have their own VA loan benefit, you are forfeiting your own VA loan entitlement. That’s because, when it comes to VA loans, VA benefits stay with the mortgage and not the veteran themselves.
Advantages of assuming a VA loan
On the buying side of the equation, there are certain advantages that come with assuming a VA loan instead of applying for your own mortgage. These benefits can vary depending on the specifics of the home sale, but they could include:
- Lower interest rate. If interest rates are higher now than when the veteran initially took out their VA loan, assuming their mortgage with its current terms can help you secure a lower interest rate.
- More affordable monthly payment. A lower interest rate often means a lower monthly payment.
- Lower closing costs. Closing costs are usually lower for assuming a VA loan, although most buyers will have to pay an upfront 0.05% funding fee.
Disadvantages of assuming a VA loan
There are also some downsides when you compare this option to applying for your own mortgage. The major drawbacks of assuming a VA loan include:
- Not all lenders allow VA loan assumptions. Some lenders do not allow sellers to transfer their VA loans to another person.
- You could put your VA loan entitlement at risk. You will also forfeit your VA loan entitlement if you allow someone who doesn’t qualify for their own VA loan benefit to assume your mortgage.
The bottom line
If you’re trying to decide whether to assume a VA loan or apply for a mortgage on your own, it’s important to consider both the pros and cons. You may be able to secure a lower interest rate and monthly payment this way, but you should definitely take the time to shop around for a mortgage so you know for sure. If you’re a seller who is considering letting another person assume your VA loan, it’s important to understand your rights and how to transfer your home while also transferring your liability and protecting your VA loan entitlement.
On either side of the table, it’s best to continue researching until you’re ready to reach out to an approved VA lender for help. Only you can decide whether assuming a VA loan is a good idea, but a qualified lender can answer your questions and guide you through the process.