You might have heard whispers about a potential perk with VA loans: the ability for someone else to take over your mortgage. So, you’re likely wondering, are VA mortgage loans assumable? The short answer is, in most cases, yes. This means a buyer can step into your shoes and inherit the existing loan terms, including that sweet interest rate you snagged.
Now, are VA mortgages loans assumable in all cases? There are a few scenarios where this might not be the case. We’ll explore this question in detail. We’ll explain how assumptions work when they make sense, and what you need to consider.
Table of Contents:
- Understanding VA Loan Assumptions
- Advantages and Disadvantages for Sellers
- Advantages and Disadvantages for Buyers
- Making An Informed Decision
- Conclusion
Understanding VA Mortgage Loan Assumptions
A VA loan assumption lets someone take over your VA mortgage when you sell your home. This differs from a typical home sale where a buyer secures a new mortgage. In an assumption, the buyer inherits your remaining loan balance, interest rate, and monthly payments.
Who Can Assume a VA Loan?
Many assume you must be a veteran to take on a VA mortgage, but that isn’t true. This can be good news for sellers because it widens their pool of potential buyers. Whether the buyer is a fellow service member or a civilian, they must meet the lender’s financial qualifications.
These qualifications can include credit score, debt-to-income ratio, and income. For anyone looking to get a loan, even if you don’t have military experience, most loans require a minimum of 3% down. To learn more about requirements for specific loan types, click here.
When Are VA Mortgages Assumable?
While generally assumable, not all VA loans can be assumed. VA loans created on or after March 1st, 1988, are generally assumable, subject to approval by the lender and the VA. If you’re a seller looking into a loan assumption, be sure to clarify this date with your loan officer.
Advantages and Disadvantages for Sellers
Are you considering letting a buyer take over your VA loan? Weighing the pros and cons will help you make the best choice. This will help you determine if this path is right for you and your goals.
Potential Advantages:
- Faster Sale: With an assumable VA loan at an attractive interest rate, you might appeal to a larger pool of potential buyers. In a market with higher mortgage rates, that attractive rate can make your house really stand out.
- Reduced Closing Costs: Assumptions typically have lower closing costs, as some fees associated with new mortgages aren’t applicable.
- Restoration of Entitlement: If the new buyer is a qualifying veteran, they can swap their VA entitlement for yours, allowing you to use your benefits again. If you anticipate purchasing another home using a VA loan in the future, a substitution of entitlement is crucial. The seller will typically complete VA form 26-6381, which formally requests their release of liability and restoration of VA entitlement, and submit this to the servicer as part of the loan assumption process.
Possible Drawbacks:
- Limited Control Over Sales Price: To make a loan assumption enticing, you might need to adjust your asking price to compensate for the equity you’ve built.
- Potential Liability Risks: If the new buyer fails to keep up with their mortgage payments and faces foreclosure, your credit could be negatively affected if the lender doesn’t grant you a release of liability.
Advantages and Disadvantages for Buyers
Purchasing a home with an assumable VA mortgage is not something to rush into. It requires careful thought. Before deciding, here’s a look at both the positive and potentially negative aspects:
Potential Advantages:
- Lower Interest Rate: Assuming a VA loan created when rates were lower gives you an edge in a high-rate market. You benefit from the lower rate locked in by the original borrower, possibly saving thousands over the loan’s lifetime.
- Reduced Closing Costs: You often pay lower closing costs and avoid fees, including a new appraisal and loan origination fees, making the purchase more affordable.
Possible Drawbacks:
- Lender and VA Approval: Like any loan, you must be approved by both the lender and the VA, which involves a review of your finances and creditworthiness.
- Down Payment Requirements: In many instances, buyers might have to make a substantial down payment to bridge the gap between the home’s value and the remaining mortgage balance. For example, imagine the homeowner wants to sell their house for $400,000 but still owes $250,000 on their VA loan. In such a scenario, you’d need to put down $150,000. This is also known as an equity loan.
Making An Informed Decision
Determining if assuming a VA loan is right depends on both the buyer’s and the seller’s specific situations. Working with experienced professionals, including real estate agents, a trusted VA loan lender, and a real estate attorney, can provide guidance tailored to your unique needs.
A thorough understanding of VA loan guidelines and expert advice is critical. This will help you confidently navigate the process. You can also use a VA loan entitlement calculator to better understand what you may qualify for.