VA Loan Assumption
VA loan is a mortgage loan in the United States guaranteed by the United States Department of Veteran Affairs. In this post you will get clear cut details about VA loan assumption, how it works, and who can assume VA loan.
What Is a VA Loan Assumption?
VA loans are assumable. This means that a borrower can take over the terms of an existing VA loan, even if they are not eligible to take out a loan for themselves.
VA loan assumption is perhaps the most overlooked benefit of VA home loans. A loan assumption can be defined as the transfer of one’s liability for an existing mortgage to another eligible applicant. VA loan assumptions allow buyers to sell or transfer properties purchased with a VA mortgage, even if the loan is not paid off in full. Most government loans are assumable loans. Most mortgage are not assumable. But this feature of the VA loan can act as a benefit for both buyers and sellers.
Also Read: VA Guaranteed Loan
Who is allowed to Assume a VA loan?
VA loan assumption is not restricted to active-duty members and veterans only. Anyone who the lender deems qualified to take on the payment amount is eligible to take over the loan.
When originally one takes a VA loan, the borrower must meet specific military services requirements. In addition to the service requirements, lenders will evaluate the borrower’s financial information to ensure they can repay the loan.
But when it come to assuming a VA loan, the new borrower does not require to meet any military services requirements. Non veterans can assume a VA loan. As with the original loan, the new borrowers will need to prove their financial qualifications to the lender. VA loan assumptions, however, require only that the new borrower – veteran or not is financially qualified for mortgage.
So, to assume a VA loan the new borrower must:
- Meet VA credit and income requirements.
- Be able to assume all mortgage obligations.
- Pay the VA funding fee, which is 0.5% of the loan balance.
Requirements to Assume a VA loan:
Although borrowers without military services can assume a VA loan, but the lender will need to approve the assumptions. As a borrower, the process will differ from taking out a new mortgage. Instead of shopping around for the best available rate, you will work with the seller’s lender to prove your credit worthiness. If the lender approves your financial qualifications, then you can move forward with a VA loan assumption.
The VA does not publish minimum borrower requirements. But many lenders will work only with the borrowers with certain financial criteria. Here are few of the common requirements:
- Credit score – You will need to have a minimum credit score of 580.
- Down payment – A VA loan typically does not require a down payment. But the new borrower may need to make a down payment in some cases.
- Income – You will need to have enough income to support the loan amount.
- Funding fee – You must pay the funding fee, which is 0.5% of the loan balance.
Situations that don’t require VA approval for a Loan Transfer or Assumptions
Neither the holder nor the VA has to participate in some loan assumptions circumstances, according to VA pamphlet 26-7, the VA’s lender handbook. Such circumstances are:
- Creation of a lien or other encumbrance that does not relate to a transfer of occupancy rights on the property.
- Creation of a purchase money security interest for household appliances.
- Transfer upon the death of a joint tenant.
- Granting of a lease of three years or less not containing an option to buy.
- Transfer to a relative resulting from the death of a borrower.
- Transfer when the spouse or child of the borrower becomes a joint owner of the property with the borrower.
- Transfer into a trust in which the borrower is and remains a beneficiary and that does not relate to a transfer of occupancy rights.
- Transfer resulting from a decree to dissolve a marriage, legal separation agreement or from a property settlement by which the spouse of the borrower becomes the sole owner of the property.
Note: Keep in mind that state law, lender requirements and other factors may affect the above circumstances. Speak with your loan officer to determine what rules should apply to your situation.
Pros and Cons of VA loan Assumption
There are various advantage and disadvantages of VA loan assumption. Assuming a VA loan can benefit both buyers and sellers in some situations. Here are some of the pros and cons of VA loan assumption:
- No military service is required to qualify for assuming a VA loan; however, sellers regain full VA loan entitlement if another veteran assumes the loan.
- Buyers can save thousands of dollars on closing cost and appraisal fees.
- At 0.5% of the loan amount, the funding fee for a VA assumption is less than the funding fee for a regular VA loan.
- Buyers inherit VA interest rates that are often lower compared to what they would get on a different type of a loan.
- When a veteran assumes a VA loan, the seller regains their full VA loan benefits.
There are also many drawbacks of VA loan assumption. Let’s look into the drawbacks
- Lenders are not required to approve the loan assumption.
- You will still need to meet the lender’s credit and income requirements.
- It can be a lengthy process if the assumption must be approved by the VA loan office.
- If a civilian assumes the loan, the original borrowers won’t get their VA loan entitlement back.
- If VA approval is necessary, the process can be long and tedious.
Buyers and sellers need to be careful when choosing to move forward with a VA loan assumption. As a buyer you will need to make sure to meet the qualifications. But as a seller you will want to consider the downside of potentially losing your entitlement.
VA loan Assumption Fees
Buyers who assume a VA loan must pay a VA funding fee equal to 0.5% of the loan balance on the data transfer. Lenders may also charge a reasonable fee for VA loan assumptions, including the cost of credit reports and a processing fee, which they may charge in advance.
According to VA’s loan rules, these fees max out at “$300 plus the actual cost of a credit report” for lenders with automatic VA loan approval authority.
Lenders who manually submit VA loan transactions can charge fee of $250 “plus the actual cost of a credit report,” or the maximum amount allowed by state law, according to the VA’s lender handbook.
State laws may require additional fees. Ask your lender what fees apply in your state.
Who is Exempt from the VA Loan Assumption Funding Fee?
There are people who are exempted from VA loan assumption funding fee. Certain people are exempted from paying the fee:
- Veterans who receive (or are entitled to receive) VA compensation for a service-connected disability.
- Veterans who are eligible to receive compensation following a pre-discharge disability exam or rating.
- Surviving spouses of veterans who died in service or from a service-connected disability.
VA Loan Assumption and Divorce
Nonmilitary spouses who are married to eligible veterans and military members can share in their partner’s VA entitlement and loan benefit. But, divorce, can make complications in spouse’s VA loan eligibility and property rights. VA loan assumption policy provides options for veterans and spouses who divorce. Veterans can petition for release from the loan and allow the spouse to assume the mortgage when “the ex-spouse was jointly liable on the loan with the veteran prior to the divorce,” according to the VA.
VA loan rules also permits ex-spouses to seek a release of liability, awarding the property to the veteran.
1. Does VA home loan allows assumptions?
Ans: Yes, VA loans are assumable.
2. What is required to Assume a VA Loan?
Ans: To assume a VA loan you must have a current loan. The new buyers must adhere to credit and income requirements defined by the VA and the lender. The new buyers must assume all mortgage obligations.
3. How to Assume a VA Loan?
Ans: This are the following steps to assume a VA loan:
- Find a home seller who will allow you to assume their VA loan.
- Verify that you meet the VA’s minimum credit score and income requirements.
- Agree to assume all obligations of the existing loan.
- Pay the funding fee, down payment, if required and closing costs.
- Exchange your VA loan entitlement.
- Ensure that the seller requests a release of liability.
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