April 30, 2021
There are many advantages to VA loans, including 0% down and incredibly low-interest rates. But one of the little-known benefits is that a VA loan may be assumable. And the surprising point is that the new borrower doesn't have to be a veteran or service member. There are rules to follow as well as advantages and disadvantages. Read on to find out more about VA loan assumptions.
VA Assumable Loan Requirements
Anyone can assume a VA loan as long as they qualify financially, and their credit is acceptable. The borrower doesn't have to be a veteran or servicemember's spouses. So, qualifying in that aspect is just like any other loan. If a borrower isn't a veteran or service member, they can't apply for a VA loan independently. The only way they can get one is through assumption.
How does a VA assumable loan work?
Instead of selling your home and having the borrower find their financing, they assume your VA loan. It's called VA loan assumption. You're signing over the property and the debt to the new borrower, and then they are legally responsible as long as you fill out the right paperwork.
The seller has to ask for a "Release of Liability" from their mortgage servicer or lender. Getting that release is vital. Here's why — if the new borrower doesn't pay the mortgage on time or stops paying, your credit will be affected.
Assumption by a Veteran or Service Member
Suppose the buyer is a veteran or service member's spouse. In that case, they can assume another's VA loan and substitute their eligibility in the place of the seller's as long as the new borrower has sufficient VA entitlement and qualifies income and credit-wise. But the seller needs to request the buyer formally substitute their entitlement. That way, the seller can use their entitlement later.
Is my VA loan assumable?
If you have a qualified veteran who wants to assume your loan, you can still get another VA loan in the future if the purchaser signs a "Substitution of Entitlement" (SOS).
"Some GI home buyers have the mistaken impression that if they sell their homes when they move to another locality or dispose of it for any other reason, they are no longer liable for the mortgage payments and that liability for these payments is solely that of the new owners. Unless you can sell the property to a credit-worthy purchaser, who is acceptable to VA and who will assume the payments of your obligation to the lender and the Department of Veterans Affairs, you will not be relieved from liability to repay any guaranty claim which VA may be required to pay your lender on account of default in your loan payments. The amount of any claim payment may be a debt owed by you to the Federal Government. Any obligation will be the object of established collection procedures. Payment of the loan in full ordinarily is how continuing liability on a mortgage note is ended. Therefore, if you expect to move from this new home and should you be unable to sell it with the purchaser obtaining new financing to pay off your loan, or if you are unable to locate an eligible veteran willing to assume your loan and substitute his or her entitlement, you should understand that you may continue to be liable to the holder of your mortgage and to the Department of Veterans Affairs."
3 Examples of VA Loan Assumptions
When rates are high, selling a home that comes with an assumable low-interest rate loan is very appealing under certain circumstances. Here are a few examples:
1. VA Loan Assumption by Non-Veterans
Don and Sally have just sold their home and have $200,000 to put down on their next purchase.
Vincent is selling his home for $400,000. He's going to move in with his daughter, so he doesn't plan on buying another home. Vincent has a VA home loan with a much lower interest than what is currently available. The balance of his assumable VA mortgage is $200,000.
Don and Sally decide to buy Vincent's house for $400,000. Even though neither are veterans, they are excited to know they can assume his low-interest VA loan. They use the proceeds of their home sale to pay the $200,000 balance.
2. VA Loan Assumption by Non-Veteran Child
Robert and Nancy have decided to sell their family home to their daughter, Tammy. They've done well for themselves over the years and are moving to their newly built dream home that's paid in full.
Robert was in the military years ago and took advantage of his VA home loan benefit. Their current balance on their loan is $200,000, with a very low interest rate. The home is worth $500,000, but they want to sell it to Tammy for what they owe. They found out that even though Tammy has never been in the military, she can still assume their VA loan.
Robert checked with his lender, and they confirmed it could be assumed. Although they know Tammy always pays her bills on time, they'll still have her complete all the paperwork to make sure she is the one liable for the loan. That also ensures they keep their great credit intact.
3. VA Loan Assumption by a Veteran
Keith and Chelsea just put their house on the market. It's a buyers-market, so they want to make their home as appealing as possible. They realize that besides having a great home, they also have an assumable loan with a very appealing interest rate.
Lynn is a veteran. She's been looking for a home for several months but hasn't had any luck finding what she wants. As soon as Keith and Chelsea put their home on the market, Lynn went to see it. It was just what she was looking for.
Since Lynn had her full VA entitlement, she assumed Keith's VA loan and released his entitlement back to him. After completing all the paperwork, the loan was transferred to Lynn. Keith received his full entitlement back, so he could buy a new home with another VA loan.
As you can see, there are many advantages and responsibilities of VA assumptions. In closing, if you have a VA loan, be sure to check with your lender or servicer before telling a borrower your loan is assumable. And if you're looking to purchase a home, and you see a property for sale that includes VA funding — make sure to check it out. It might be a great deal!
To learn more about PenFed loans or what loan is right for you:
- Call 866-386-7254
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