Are VA Loans Assumable? What You Need to Know
8 MIN READ
Published September 26, 2023 | Updated November 14, 2023
A VA loan is a loan backed by the U.S. Department of Veterans Affairs and is available to those who are currently or have served in the U.S. military. VA loans had traditionally been non-assumable but are now assumable by those who meet the eligibility requirements, offering a valuable resource for managing veteran debt. These loans can be assumed by those who have VA benefits and civilians.
What Are Assumable VA Loans?
An assumable VA loan refers to a loan that can be transferred to another person, even if they’re not qualified for a VA loan. When you assume a loan, you take over the existing terms and interest rate of the VA loan. This means that you’ll have the same mortgage payment that the seller had.
With average mortgage rates at 7.42% on 30-year mortgages, assumable VA loans can present a huge benefit to borrowers if the seller has locked in a great interest rate. Most mortgages are not assumable, but most government loans, including VA loans, are.
What Does It Mean for a VA Loan to be Assumable?
When a VA loan is assumable, it simply means that the buyer can take over the existing VA loan from the seller and continue to pay the mortgage at the existing loan terms and interest rate.
Definition and Types of Assumable Loans
There are several different types of assumable loans, each with its own set of eligibility criteria. All VA loans are assumable, but there are rules that govern how they can be assumed. Other government-backed loans are also usually assumable if the lender approves the sale. FHA loans and USDA loans are both assumable.
Conventional loans are usually not assumable because of the due-on-sale clause in the mortgage contract. The clause means that the lender can ask for the entire outstanding loan balance when the property is sold. If you have an adjustable-rate mortgage (ARM), you may be eligible for assumption. For example, Fannie Mae allows assumable ARMs on the condition that you give up the option to convert the mortgage to a fixed-rate mortgage later.
Are All VA Loans Assumable?
Yes, all VA loans are assumable. Whether you are a civilian, a veteran, or are serving actively, you can get access to an assumable VA loan. However, there may be differences in how you can assume the loan based on certain regulations. For example, all loans originated before March 1, 1988, are freely assumable. This means that nobody has to approve the assumption. Loans generated after that are assumable, but the lender needs to approve and deem the buyer creditworthy. The buyer also needs to pay a processing fee.
Advantages and Disadvantages of Assumable VA Loans
If you’re thinking of assuming a VA loan, weigh the advantages and disadvantages of doing so to ensure it’s right for you.
- VA loans tend to offer some of the lowest interest rates on mortgages. When you assume these loans, you lock in those great rates. In a high-interest rate environment, you may be able to save a considerable amount of money.
- Because the balance on the assumable mortgage is usually lower than taking out a new mortgage, the closing costs are lower, too.
- If the borrower has VA loan eligibility, the seller can regain their entitlement amount. This can be a big benefit if the seller wants to get a new loan in the future.
- The funding fee for a new VA loan is usually 2.15% to 3.3%. But in the case of loan assumption, the funding fee is just 0.5% of the loan amount.
- When you apply for a VA loan, lenders don’t subject your application to the same underwriting process as a new mortgage. This means you may be at risk of taking on a larger mortgage debt than you can handle.
- If you’re a seller, you’ll only be able to regain your VA loan entitlement if an eligible service member assumes the loan. This may hurt you when you plan to purchase your new home using your VA loan benefits.
- If you’re a buyer, you still need to meet the qualifying requirements. If the lender doesn’t approve the loan assumption, you may have to start your search from scratch.
Eligibility Criteria for Assuming a VA Loan
While there are several benefits of assuming a VA loan, you’ll first have to ensure you meet the eligibility criteria of the lender. It’s also a good idea to learn more about the closing costs you may have to pay so you can be financially prepared if the lender approves the assumption.
Who Can Assume a VA Loan?
When you originally take out a VA loan, you must meet specific service requirements to be eligible. When assuming a VA loan, you do not need to meet these requirements. This means that VA loans can be assumed by active-duty military members, veterans, certain surviving spouses, and civilians. You’ll still need to qualify with the lender before you can assume the loan.
VA Loan Assumption Closing Costs
When assuming a VA loan, determining who pays certain closing costs can be confusing simply because the VA prohibits buyers from paying fees that they’d normally pay with conventional loans. Any fees that the buyer cannot pay will have to be paid by the seller. This includes brokerage fees or real estate agent fees and attorney fees. Other than reasonable title services, lenders cannot charge attorney’s fees from buyers. These fees will have to be paid by the seller instead.
VA Assumable Loan Qualifications
If you’re a borrower, the process of assuming a VA loan is very different from getting a new mortgage. You’ll have to prove your creditworthiness to the seller’s lender. In most cases, the common requirements of most lenders include:
- A minimum credit score requirement. This may be anywhere from 580 to 620, depending on the lender.
- Typically, a VA loan doesn’t require any down payment. But when you assume a VA loan, you may have to make a down payment in certain cases.
- You’ll also need to pay a VA funding fee of 0.5%.
- You’ll need to demonstrate that you have enough income to support the monthly mortgage payments.
Every lender is different, and they may have their own standards. Unlike a conventional mortgage, you won’t have the option to shop around and compare different lenders when you assume a VA loan. If you don’t meet the qualifications of the seller’s lenders, you may have to look for another property with an assumable loan.
How To Assume a VA Loan
The process of assuming a VA loan is very different from applying for a conventional loan. Familiarize yourself with the loan process so you’ll know what to expect and can be prepared for any roadblocks along the way.
- Work with a real estate agent to find a property for sale with an assumable VA loan. Look on MLS or on specialized real estate websites to search for properties.
- Ensure you are eligible for loan assumption. Review your finances to ensure you can take on the mortgage. Be prepared to verify your credit score, assets, debt-to-income ratio, and more. Get a certificate of eligibility if you’re a qualified veteran.
- Submit your application to the lender to get approved.
- The home seller must get a release of liability letter from the lender before closing. If you’re a seller, you’ll need to fill out the VA form 26-6381 and submit it to get released from the liability of the mortgage.
- The buyer then pays the down payment when applicable, closing costs, and funding fee. If the seller has significant equity in the home, the buyer may have to pay a large down payment.
- The buyer will then exchange their loan entitlement with the seller when applicable so the seller can reuse their loan benefits when they buy a new home.
Tips for Assumption
The loan assumption process can sometimes be complicated. But there are several tips to keep in mind to ensure you can avoid potential pitfalls and ensure that the transaction is smooth and as stress-free as possible.
- Ensure that the lender signs off on the loan assumption because that will determine who is responsible for the loan payment. If you stop making payments before the lender releases your obligation to pay, you may incur late payment fees, and it may hurt your credit score.
- Always work with a real estate agent who has experience in transactions with assumable loans to find a property with an assumable loan.
- It’s important to always get an appraisal for the property to ensure you’re paying the right price.
- Get a title search to ensure there aren’t any outstanding encumbrances or liens on the property.
Brad Reichert, debt expert and Founder and Managing Director of Reichert Asset Management LLC, adds another tip. “It’s important to note that the assumptive buyer of a VA loan is not required to pay Private Mortgage Insurance (PMI) on a property in which they will have less than 20% equity,” Reichert says.
“With mortgage rates nearing 20-year highs, this is a notable benefit because it can make the mortgage loan less expensive than a conventional loan. This, in addition to avoiding several fees and receiving a much lower than market interest rate, makes it understandable why assumable VA loans can be so attractive to many buyers,” Reichert explains.
Finding VA Loans That Are Assumable
There are several different resources for finding properties with assumable VA loans. Here are some places you can start with:
- Check websites like TakeList.com to find homeowners who may be willing to agree to mortgage loan assumptions.
- Check local print ads to find a good deal.
- Work with a competent real estate agent to help find homes with assumable loans.
- The MLS is also a good resource for finding assumable loans. Ask a real estate agent to find such properties on the MLS.
Comparing VA Loans to Other Assumable Loans
Most government-backed loans are assumable, but there are key differences between them that you should be aware of so you can make informed decisions.
VA Loans vs. FHA Loans
FHA loans are loans backed by the Federal Housing Administration. These loans help those with lower credit scores and smaller down payments to afford homeownership. VA loans are available to qualifying active military service members, veterans, and military families and are backed by the U.S. Department of Veterans Affairs.
VA home loans and FHA loans are both assumable. For FHA loans originated after December 15, 1989, the lender must approve the assumption and transfer the liability to the buyer if the buyer is creditworthy. Loans originated before that date can be assumed, but the mortgage lender isn’t required to release the seller from the mortgage liability. In certain cases, such as inheritance or death, the lender doesn’t have to check the creditworthiness of the buyer or approve the sale.
For VA assumptions, the lender has to approve the assumption and ensure the buyer is creditworthy for any loan originated after March 1, 1988. Loans originated before that date are freely assumable.
VA Loans vs. Conventional Loans
Unlike VA loans, conventional loans are not backed by the government. These loans are available to anyone who can meet the lender’s mortgage requirements. VA loans are only available to current military members, veterans, and some surviving spouses. Unlike VA loans, conventional loans are not assumable except for rare cases. If you have a Fannie Mae adjustable-rate mortgage, you may be able to assume the loan if you agree not to convert to a fixed-rate loan later.
The Bottom Line on VA Loan Assumptions
All VA loans are assumable, and it may be a tempting deal for home buyers, including those dealing with veteran debt, who are looking for lower interest rates. But you’ll still need to meet the lender’s mortgage requirements. Take the time to weigh the pros and cons of this option before you dive in.