When people discuss the many advantages of the mortgages offered by the U.S. Department of Veterans Affairs’ home loan program, they tend to focus on the competitive interest rates or the fact that a down payment isn’t required. However, the benefits of VA loans don’t stop there. Assumability is an advantage that often gets overlooked, but it’s one that smart borrowers will consider. So what does it mean when a home loan is assumable? Are VA loans assumable? Why should you care?
Are VA Loans Assumable?
As Investopedia explains, an assumable mortgage is one that allows a homeowner selling their property to transfer their outstanding mortgage to the person or persons buying the home. Instead of having to arrange for their own financing, the buyer takes over, or assumes, the existing mortgage secured by the property, including its current principal balance, repayment period interest rate, and any other contractual terms of the loan.
The Assumability of VA Loans
Are VA loans assumable? As the VA makes clear, the answer is yes. As long as the individual assuming the home loan qualifies, VA-backed loans are assumable. This fact can benefit sellers and any buyers interested in purchasing a home by assuming an existing mortgage.
Assuming a VA Loan
You’re likely aware that only certain people qualify for VA loans. After all, the VA’s housing benefit is earned through military service. However, you don’t have to qualify for a VA loan in order to assume one. Generally, anyone who is financially qualified can assume a VA loan. What has to happen before you can assume a VA loan? As The Mortgage Reports indicates, certain conditions must be met:
- The buyer must qualify based on VA credit and income standards.
- The existing loan must be either current or brought current by the payment of any past due amounts at or before closing.
- Fees must be paid. These fees include a processing fee and a funding fee based on the existing principal loan balance.
- The buyer must agree to assume all mortgage obligations.
- The VA or an authorized lender must approve the loan assumption.
The Benefits of Assumability
What makes assumable mortgages attractive? As Military.com points out, VA loans are widely recognized for offering competitive interest rates, so there’s a good chance that an existing VA loan will have a better interest rate than a newer loan. A lower interest rate means that it will cost less to borrow money, so securing one can result in substantial savings. Therefore, sellers can use an assumable mortgage to entice would-be buyers, increasing their odds of getting a higher price or a speedy sale. Meanwhile, buyers get a loan with favorable terms and a desirable interest rate. As an added bonus, buyers who opt to assume a VA loan get to bypass much of the paperwork involved in applying for a new loan and can avoid paying appraisal fees and other common costs.
The Question of Entitlement
When a borrower takes out a VA loan, they use all or part of their entitlement to do so. What happens to that entitlement if their loan is assumed by another buyer? As Military.com notes, that depends on the buyer. If the mortgage is assumed by someone who is eligible for a VA loan and is willing to certify that they are planning to make the home their primary residence, then the buyer may be able to substitute their entitlement for the seller’s. If the mortgage is assumed by a civilian or a qualified service member/veteran who doesn’t have enough entitlement, then the seller’s entitlement remains tied to the original loan until it is paid off.
Assumability Issues with VA Loans
The assumability of VA loans can be a great benefit, but as NerdWallet reports, it also presents several issues that you should take into consideration before you assume a loan or agree to allow a buyer to assume your loan.
Sellers need to consider the effect of assumability on their entitlement and how this might impact their future housing plans. They also need to obtain a Release of Liability form to ensure that they won’t be held liable for the original loan. What about buyers? They’ll need to pay attention to the down payment needed. If the purchase price exceeds the balance remaining on the VA loan, they’ll need to make up the difference at the closing table by either making a hefty down payment or securing a second loan.
Do you have questions about VA loans? PrimeLending of Manhattan, Kansas, has the answers that you need. Whether you’re curious about how an assumable mortgage works or interested in learning more about how to get the most out of your entitlement, we can offer expert insight and guidance. Contact us today to arrange an appointment.