Are VA Loans Assumable? Everything You Should Know
Are VA loans assumable? The short answer is yes, and you can even take over a VA loan without meeting the military service qualifications. It’s true!
VA loans, or Veterans Affairs loans, help veterans, active duty servicemembers, and their eligible surviving spouses buy homes. While these loans are provided by private lenders (e.g., mortgage companies, banks, etc.), the VA pays for a portion of the loan so that lenders can offer borrowers better terms.
If you want to buy or sell a home that's being financed by a VA loan, the good news is that the loan is assumable! However, assuming a VA mortgage loan isn’t as easy as transferring the title and calling it a day. VA loan assumptions — and their lenders — come with their own specific requirements based on your situation.
In this post, we’ll discuss what assumable loans are, how to find and assume a VA home loan, how the homeseller’s entitlement may be impacted, and whether or not it’s a good option for you.
Let’s dive in!
What Is an Assumable Mortgage?
An assumable mortgage refers to when a homebuyer takes over a seller’s current mortgage instead of obtaining a new loan of their own.
Since the homeseller transfers the existing mortgage to the new homeowner, the buyer can then work with their lender to complete the mortgage assumption process. Upon approval, the new home’s owner also becomes the new borrower. They take over the monthly mortgage payments and become responsible for paying off the original loan balance.
If you’re looking for a mortgage option with lower interest rates, minimal closing costs, and a faster approval process, an assumable mortgage might be a good option.
Who Can Take Over a VA Loan?
If you're wondering, "Are VA loans assumable?" keep in mind that to assume a VA loan, specific eligibility requirements must be met. The borrower who initially takes out the loan must meet the military service qualifications, including one or more of the following:
- Served 90 consecutive days of active duty during wartime
- Served 181 days of active service during peacetime
- Is the spouse of a deceased service member who died during service or because of a service-related disability
- Served in the National Guard or Reserves for at least six years or served 90 days (30 or more consecutively) under Title 32 orders
The borrower must also meet the mortgage lender’s requirements to ensure they can repay the loan amount. These usually include the following:
- Minimum FICO credit score in the low- to mid-600s (the VA itself doesn’t have a minimum credit score requirement, but VA lenders often do)
- History of making timely payments
- Debt-to-income (DTI) ratio of 41% or less, with few exceptions, like residual income
What makes VA loan assumptions interesting is that the new borrower doesn’t need to meet these VA-specific requirements, only those outlined by their mortgage lender. If you have no military experience but are assuming an existing VA loan, you can do so. However, you’ll also likely need to come up with a down payment and a funding fee (more on that shortly).
How to Find and Assume a VA Loan
You could work with a traditional real estate agent to find homes with sellers that have VA loans, explore print ads, or explore sites where sellers are open to partaking in the assumption process.
Or better yet, you can set up an account on Aalto. You’ll have access to our exclusive inventory, including homeowners with VA loans, and receive expert help and up to 1.5% cash back on your home purchase.
Once you find a VA loan to assume, the process typically goes as follows:
First, determine if you meet the military service requirements for a VA loan. If you’re also a qualified veteran, you can simply replace the seller’s eligibility with your own. If you’re not, you must meet the requirements the seller’s mortgage lender sets. Either way, their lender will want to see proof of income and your credit score and history, and evaluate your DTI.
If you’re eligible to assume a VA loan, you and the lender will then sign off on it, and then you’ll be required to pay the down payment and funding fee.
What Is the VA Funding Fee?
When you assume a VA loan, you’re required to pay a funding fee. This fee goes directly to the VA, and it’s equivalent to 0.5% of the remaining loan balance. For example, if the loan is $400k, the funding fee is $2k ($400,000 x 0.5%).
Your funding fee must be paid within 15 days after you assume the loan. However, you may qualify for an exemption if you:
- Are still on active duty and received a Purple Heart
- Are the spouse of a deceased service member who died while serving or because of a service-related disability.
- Are getting compensated for a disability you received while serving.
- Are entitled to compensation for a disability you received while serving, but you’re receiving active duty or retirement pay instead.
You won't be eligible for the funding fee exemption if you didn’t meet the original military service requirements to assume the VA loan.
How to Sell a Home With a VA Loan
If you purchased a home with a VA loan and you're ready to sell, here are some important questions to consider.
What Happens to Your VA Loan Entitlement?
If you currently have a VA loan and you’re selling to a new buyer who is also eligible for a VA loan, they can assume your eligibility, and you can qualify for another VA loan. Usually, all you have to do is ask the VA to restore your loan entitlement during the homeownership transfer process.
If you’re selling to someone who wouldn’t qualify for one, you’ll have to wait until after the home is sold and the loan is paid off before the VA restores your loan entitlement. You should be mindful of that before agreeing to the real estate transaction.
Do You Need a Release of Liability After VA Loan Assumption?
As a seller, before you complete the closing process, you should confirm with your lender that they’ll sign a release of liability. If they don’t, you could be liable if the new borrower fails to make their mortgage payments. This could lead to severe financial repercussions for you that, frankly, should no longer be your responsibility.
If your lender isn’t willing to provide you with a release of liability, we strongly recommend that you don’t complete the transaction. You’ll be taking on an unnecessary risk that can damage your finances and credit score for years to come.
Is Assuming a VA Loan a Good Option For You?
Are VA loans assumable? They are, but like most things, have pros and cons. We’ll start with the pros:
Benefits of VA Loan Assumption
- You can assume a VA loan without having to meet the requirements the original borrower had to
- You’ll pay less in closing costs and could potentially get a lower interest rate
- If you want to pay the loan early, you won’t be charged a prepayment penalty because VA regulations prevent them
- The approval process is usually faster because you’re assuming an existing loan instead of applying for a new one
Drawbacks of VA Loan Assumption
- Finding a VA loan to assume can be tricky — but at Aalto, we’re here to help!
- You’ll be required to pay a funding fee of 0.5% unless you qualify for an exemption
- You still have to meet the VA mortgage lender’s requirements, which also typically involves coming up with a down payment
- If you’re selling your home to someone who’s assuming your VA loan without the military service requirements, you cannot qualify for another VA loan until the new buyer pays the loan off in full
Are VA Loans Assumable on Aalto?
At Aalto, our goal is to make every aspect of the home buying process smoother, which includes pointing you in the right direction for getting help from a lender for VA loan assumptions. Whether you’re a buyer or a seller, we’re here to handle all the legal paperwork on your behalf to minimize the stress often associated with real estate transactions.
Are you ready to assume a VA loan, or someone to assume your loan? Get started with Aalto today!
Aalto is a real estate broker licensed by the State of California, License #02062727 and abides by Equal Housing Opportunity laws. This article has been prepared solely for information purposes only. The information herein is based on information generally available to the public and/or from sources believed to be reliable. No representation or warranty can be given with respect to the accuracy of the information. Aalto disclaims any and all liability relating to this article.