So you’re curious about Veterans Affairs (VA) loan assumption? The short answer is, yes, VA loans are assumable, but there are a number of requirements you’ll need to meet in order for it to be applicable to your situation; which we’ll explain in full detail throughout the article. First, let’s answer a couple of questions about mortgage assumption and VA loan requirements in general, and then we can begin to understand if a VA loan can be assumed by someone else.
What Is Mortgage Assumption?
Let’s say a buyer is in the market for a new home and interest rates recently went up to 6%. The buyer has found a home they like, and the seller has an outstanding mortgage on the home with an interest rate of only 3%. The seller offers the buyer the option of assuming the mortgage. That means the outstanding mortgage and its terms, including the lower interest rate, would be transferred to the buyer.
As an example, let’s assume the current value of the home is $200,000 and the remaining principal balance on the loan is $125,000. The buyer must make a down payment of $75,000 for the seller, so that the seller gets their equity out of the home. The buyer would then approach the seller’s current mortgage lender and ask to assume the loan. This means the buyer would quite literally take over the mortgage as it is and continue making the payments at the current 3% interest rate for the remainder of the life of the loan.
The main benefit for the buyer is they get a mortgage with a lower interest rate than the current rates. Another advantage is the length of the mortgage. If the seller had been paying the mortgage for 10 years, there are only 20 years left on the loan versus a typical 30 year mortgage.
What’s the catch? Well, not everyone has enough of a down payment to cover the seller’s equity, so this can be a hurdle for those without large cash balances available.
What Is A VA Mortgage Loan?
A VA loan is a mortgage loan guaranteed by the United States Department Of Veterans Affairs. VA loans are taken out by current and former military members. During World War II, the United States government wanted to make sure that returning veterans had the best possible chances of success upon returning to civilian life.
In 1944 they established the Servicemen’s Readjustment Act, commonly known as the GI Bill. The GI Bill contained numerous benefits for veterans and their families such as tuition reimbursement for college, healthcare benefits, job programs, and home loan programs.
What Are The Benefits Of A VA Loan?
The benefits of a VA loan are options such as no or low down payment, lower closing costs and interest rates, along with no mortgage insurance costs. There may also be more flexible credit score requirements for VA loans.
With a typical mortgage, the buyer is required to come up with a large down payment to satisfy the lender’s requirements. Under the VA loan program it is possible to qualify for 0% down payment!
Another benefit is that mortgage origination fees are significantly reduced. Under the VA loan program, closing costs are capped at 1% of the loan amount. There are several other fees that lenders cannot charge when approving a VA loan, so veterans can save money on these as well.
Lower interest rates are another great advantage of a VA loan. Typically, a veteran applying for a VA loan can expect an interest rate about 0.5% lower than the going market rate. That may not sound like much, but over the life of a 30 year loan it can add up to substantial savings!
Lastly, there is no requirement to pay mortgage insurance fees. Most lenders offering conventional and Federal Housing Administration (FHA) loans require borrowers to pay for mortgage insurance in case they default on their loan. This can be up to 1.75% of the loan amount due at closing, as well as additional monthly fees for many years after.
Are VA Loans Assumable?
In short, yes! However, as with any mortgage loan there are several requirements. Let’s go over them below:
- The seller must have a 12 month history of no missed or late payments. If the buyer has a current mortgage this rule applies to them as well.
- The buyer must pay a 0.5% funding fee (This may be waived if the person assuming the loan is a veteran who meets certain criteria, or a veteran’s spouse).
- The buyer must qualify for the mortgage according to the lender’s borrowing requirements regarding credit score and income.
- The buyer must agree to take over the loan in its entirety along with any stipulations in the original loan.
- The home must be used as the buyer’s primary residence. VA loans may not be assumed if the buyer intends to use the home as a rental or an investment property.
As you can see, there are numerous benefits to assuming a VA loan. Loan assumption may or may not be right for you depending on your current situation. If you are considering assuming a VA loan or simply want to explore other purchasing and mortgage options, contact one of our Loan Officers here at OVM Financial today!