How Do I Assume a VA Loan? Your Definitive Guide

So, you’re considering assuming a VA loan? Excellent choice! It’s a powerful strategy for securing a great mortgage rate, especially in today’s fluctuating market. In a nutshell, assuming a VA loan means taking over the existing mortgage of a veteran, stepping into their shoes with all the original loan terms intact. The process involves qualifying with the lender, completing necessary paperwork, and ultimately becoming responsible for the remaining loan balance. Let’s break it down, step-by-step.

Understanding VA Loan Assumption

Before we dive into the “how,” let’s ensure you grasp the “what.” A VA loan is a mortgage guaranteed by the U.S. Department of Veterans Affairs (VA) and available to eligible veterans, active-duty service members, and surviving spouses. One of its most attractive features is the assumability clause, allowing qualified individuals to take over the loan, even if they aren’t veterans themselves (with some caveats we’ll discuss). This can be exceptionally advantageous if the existing loan has a lower interest rate than what’s currently available.

The Assumption Process: A Detailed Walkthrough

Here’s a breakdown of the process for assuming a VA loan:

1. Identifying a VA Loan for Assumption

The first hurdle is finding a home with an assumable VA loan. You might encounter these through real estate listings specifically mentioning VA loan assumption or by working with a real estate agent familiar with this type of transaction. Direct communication with the seller is crucial here.

2. Assessing Eligibility

Whether you’re a veteran or not, you’ll need to meet the lender’s creditworthiness requirements. This usually includes a solid credit score, a stable income, and a manageable debt-to-income ratio (DTI). If you are not an eligible veteran, the lender will want to see a credit score of at least 620, but it could be higher. Don’t assume you automatically qualify; the lender will scrutinize your financial profile.

3. Initiating Contact with the Lender

Once you’ve found a suitable property, contact the VA loan servicer (the company that handles the loan payments). They’ll provide you with the necessary paperwork and guide you through the application process. The lender will usually require a copy of the sales contract or agreement.

4. The Assumption Package

Prepare for a mountain of paperwork! The assumption package typically includes:

• Assumption application: This is the main document where you provide your personal and financial information.
• Credit report authorization: Allows the lender to access your credit history.
• Income verification: Includes pay stubs, W-2s, and tax returns.
• Asset verification: Bank statements, investment account statements, etc.
• Sales contract: The agreement between you and the seller.
• DD214: If you’re a veteran, your Certificate of Release or Discharge from Active Duty.

5. Underwriting and Approval

The lender will carefully review your application, assess your creditworthiness, and determine if you meet their criteria for loan assumption. This process can take several weeks, so patience is key. They’ll be looking at your ability to repay the loan, your employment history, and your overall financial stability.

6. VA Approval (If Required)

Here’s where things get interesting. Prior to 1988, a VA loan could be assumed by anyone, veteran or not, with no VA approval required. However, for loans originated after March 1, 1988, the VA must approve the assumption if the original veteran wants their VA loan entitlement restored. We will dig into VA Loan Entitlement later in this article. This requirement is in place to protect the original veteran’s VA loan entitlement. If the assuming party is an eligible veteran, then this requirement does not necessarily apply, but it is best practice to involve the VA.

7. Assumption Fee

Brace yourself for the assumption fee. The VA permits lenders to charge a fee for processing the assumption, currently capped at 0.5% of the outstanding loan balance. This is far lower than origination fees charged on new mortgages, which adds to the attractiveness of the strategy.

8. Closing the Assumption

Once approved, you’ll proceed to the closing, similar to a traditional home purchase. You’ll sign the necessary documents, pay the assumption fee, and officially become responsible for the VA loan. After the assumption, you will become solely responsible for payments, property taxes, homeowners insurance and upkeep on the property.

Potential Pitfalls and Considerations

Assuming a VA loan isn’t always a walk in the park. Here are some potential challenges to keep in mind:

• The Due-on-Sale Clause: While VA loans are assumable, you’ll want to ensure the loan documents don’t contain a “due-on-sale” clause that could potentially hinder the assumption. However, these clauses are usually not enforced with VA loans.
• The Seller’s Equity: The difference between the outstanding loan balance and the home’s current market value represents the seller’s equity. You’ll need to arrange to pay the seller this amount, either through cash, a separate loan, or a combination of both.
• Creditworthiness: If your credit score is less than stellar, you may struggle to get approved for the assumption.
• Entitlement Restoration: For the original veteran, the restoration of their VA loan entitlement is a major consideration. The veteran will not be able to use their VA Loan Entitlement on another property, and this can be an issue if they are hoping to do so.

FAQs: Your Burning Questions Answered

Let’s address some frequently asked questions to solidify your understanding of VA loan assumption:

1. Can I assume a VA loan if I’m not a veteran?

Yes, generally! For loans originated before March 1, 1988, anyone can assume the loan, even if they aren’t an eligible veteran. For loans after that date, it’s more complex but still possible. The lender must still approve the assumption and the VA must approve the assumption for the original veteran’s entitlement to be restored.

2. What credit score do I need to assume a VA loan?

Lenders typically look for a credit score of 620 or higher, but this can vary depending on the lender. The higher your credit score, the better your chances of approval and potentially more favorable terms.

3. What is VA loan entitlement, and why is it important?

VA loan entitlement is the amount the VA guarantees to a lender if a veteran defaults on their mortgage. It allows veterans to obtain mortgages with no down payment. When a VA loan is assumed, the original veteran’s entitlement is tied up until the loan is paid off or the assuming party is also an eligible veteran and can substitute their own entitlement. Restoration of the original veteran’s VA loan entitlement is very important for the original veteran to be able to use their benefit again.

4. How does the assumption fee work?

The assumption fee is a one-time charge paid by the assuming party (you) to the lender for processing the assumption. It’s capped at 0.5% of the outstanding loan balance.

5. What happens to the seller’s VA loan entitlement after the assumption?

If the loan was originated after March 1, 1988, the seller’s VA loan entitlement remains tied up until the loan is paid off unless the assuming party is an eligible veteran and the VA approves a substitution of entitlement, or if the loan has been assumed and paid in full. The veteran should seek full restoration before obtaining another property.

6. Can I negotiate the purchase price of the home to account for the assumption fee?

Absolutely! Everything is negotiable in real estate. You can try to negotiate with the seller to lower the purchase price to offset the assumption fee or other costs associated with the transaction.

7. How long does the VA loan assumption process take?

The timeline can vary, but expect the process to take 45 to 90 days. It depends on the lender’s processing times, the complexity of the transaction, and how quickly you can gather the necessary documents.

8. What if the home needs repairs before the assumption?

As with any home purchase, you should conduct a thorough home inspection. If repairs are needed, you can negotiate with the seller to have them completed before the assumption or adjust the purchase price accordingly.

9. Can I use a real estate agent to help me find a VA loan to assume?

Definitely! A real estate agent experienced with VA loans can be a valuable asset. They can help you find suitable properties, negotiate with the seller, and navigate the complexities of the assumption process.

10. What if I can’t qualify for the VA loan assumption?

If you’re denied for the assumption, you may need to explore other financing options, such as a traditional mortgage or an FHA loan. You can also work on improving your credit score and financial profile to reapply later.

11. Is assuming a VA loan always the best option?

Not necessarily. While the lower interest rate can be tempting, you need to consider the seller’s equity, the assumption fee, and your overall financial situation. Compare the costs and benefits of assuming the loan versus obtaining a new mortgage to determine the best option for you.

12. What if the original VA loan has a second mortgage?

This can complicate the assumption process. You’ll need to work with the lender and the seller to ensure the second mortgage is properly addressed, either by being paid off or subordinated (meaning it remains in place but is secondary to the VA loan).

The Bottom Line

Assuming a VA loan can be a savvy financial move, particularly when interest rates are on the rise. By understanding the process, assessing your eligibility, and working with experienced professionals, you can navigate the complexities and potentially secure a fantastic mortgage rate. Just remember to do your due diligence, ask plenty of questions, and be prepared for the paperwork! Good luck!