Are you thinking of taking out a VA loan? If so, one important question to consider is whether the loan is assumable or not. Assumption allows another borrower to take over any remaining payments on your loan should they choose to do so.
It's helpful for borrowers to understand some of the basics of assumable loans and how that process works with a VA mortgage to help inform your decision-making process.
In this article, we will explain what assumable loans are and why these types of mortgages may be beneficial in certain scenarios. We'll also explore how Assumption works with specific VA loans and evaluate whether it suits your circumstances.
What Is An Assumable Loan
An assumable loan is a mortgage that allows the borrower to transfer their existing loan and its remaining balance to another party. This Assumption means that if the original borrower fails to make payments, the new borrower can assume the debt and take over making payments on their behalf. The benefits of assumable loans are that they offer more favorable terms than what could be obtained on a new loan.
Are VA Loans Assumable
Yes, VA loans are assumable with certain conditions. The loan must have originated before March 1st, 1988, and must not have any delinquencies or late payments in the last 12 months to be eligible for Assumption. Because of this, it's important to understand how Assumption works with VA mortgages and to consider whether such a feature benefits you.
What VA Loan Assumption Means For Buyers
VA loan assumptions are a great option for buyers who may not qualify for a conventional loan. With an assumable VA loan, the new buyer can take over the existing loan and benefit from its lower interest rate without applying for a mortgage.
In addition, if you're selling your home and don't have enough equity to cover closing costs, an assumable loan can help you avoid those costs.
VA Loan Requirements For Buyers
Minimum Credit Score
To qualify for an assumable VA loan, borrowers must have a minimum credit score 620.
Maximum Debt-to-Income Ratio
The maximum debt-to-income (DTI) ratio allowed with an assumable VA loan is 41%. Your monthly debt payments must be 41% of your gross monthly income.
Residual Income
Besides the other criteria, according to VA requirements, you must demonstrate enough residual income for your family size. Residual income is left over after all expenses and debt payments are subtracted from gross monthly income.
The VA funding fee
The VA Funding Fee is an additional cost associated with a VA loan. It's paid directly to the Department of Veterans Affairs and helps cover operational costs associated with administering the program.
The fee is based on whether you're making an initial purchase, using your benefit again after a previous loan was paid off, or making a down payment of less than 10%.
Generally speaking, it ranges from 0.5-3.6% of the total loan amount and can be paid in cash at closing or rolled into the total loan amount. Knowing how much this fee is upfront can help determine if a VA Loan is right for you.
The VA Processing fees
VA loans come with some added costs and fees for borrowers. One of these fees is the VA processing fee, which covers the cost of evaluating and processing applications for loan approval. This fee can range from 1 to 3 percent of the total loan amount and is paid at or before closing.
The exact amount of this fee varies depending on factors such as credit score, loan type, and amount borrowed. It is important to understand these fees when considering a VA loan, as they can significantly impact the total cost of borrowing.
What VA Loan Assumption Means for Sellers
VA loan assumption can be a great way for sellers to get out of their loan obligation while allowing buyers to take over existing payments. For sellers, this means they can avoid having to pay off the full balance of their loan or bear the cost of refinancing.
As long as all VA requirements are met during the process, sellers can know that the new borrower will assume the loan. Furthermore, sellers may benefit from a reduced closing cost if their mortgage is assumable. This Assumption can make selling a home with a VA loan more attractive to potential buyers.
VA Loan Requirements For Sellers
When a buyer takes over an existing loan, the VA requires the seller to meet certain requirements.
Credit Profile
The seller must be current on their mortgage payments up until the time of the transaction. Furthermore, they must prove that they haven't had any late payments in the past twelve months leading up to the loan transfer.
Closing Costs and Fees
As mentioned above, buyers can't pay certain closing costs with a VA loan, so these fees will have to be paid by the seller or waived entirely.
These may include attorney's fees, real estate agent/brokerage fees, and other standard closing costs. The seller should also ensure all property taxes are current before the loan is assumed.
The seller will also need to provide proof of ownership, such as a deed or other legal document, and evidence that the title to the property is free and clear. Finally, they must ensure that any liens on the property are either paid off or subordinated for the assumable loan process to be completed.
How Selling Through Assumption Affects Your Eligibility for a VA Loan
Regarding VA loans, the Assumption of your loan can also impact how much entitlement you have available for future purchases.
Your original entitlement is generally restored when a homebuyer assumes your mortgage and pays off the full amount of the loan balance at closing. If you've already used some (or all) of your entitlement previously, you may still be able to use it again should someone assume your existing loan.
If you decide to sell through an assumption process rather than paying off your loan and then selling, it's important to understand any applicable rules or limitations from the Department of Veterans Affairs.
Pros and Cons of VA Loan Assumption
Pros of VA Loan Assumption:
- It can help you avoid costly prepayment penalties if you want to sell your home.
- It may allow buyers to get a more favorable interest rate on the loan.
- It can be a great option for sellers who need to quickly transfer their mortgage obligation without going through the lengthy process of getting approved for another loan.
Cons of VA Loan Assumption:
- Not all lenders will permit VA loan assumption, so it's important to confirm with your lender that they provide this option to determine if it's right for you.
- Buyers taking over an assumable loan may need additional approvals from the Department of Veterans Affairs and the lender.
- Additional fees may apply for the assumption process, which could add to your closing costs as a seller.
FAQs
Are VA loans assumable?
Yes, VA loans are assumable.
What are the advantages of assuming a VA loan?
Assumption allows to take advantage of the seller's favorable interest rate and terms, potentially saving money on financing. Assumption also eliminates the need for a new loan application, appraisal, and certain closing costs.
Are there any eligibility requirements for assuming a VA loan?
The buyer must meet specific eligibility criteria to assume a VA loan. They must be qualified veterans or eligible non-veterans, assuming the loan with the VA's and the lender's approval.
Conclusion
VA loans are assumable, meaning that a new buyer can take over the existing loan of a seller who holds one at less than the current market rate. This option can offer sellers an attractive alternative to selling through a traditional sale, where they must still pay any remaining principal and interest on their original loan amount. For buyers, the benefits include getting a lower rate and avoiding some origination costs that come with a standard loan.
