Why would you want to know how to assume a VA loan? Assuming a VA loan could be a fantastic way to snag a home loan with amazing terms without a lot of fuss, saving you time and a significant amount of money when it comes to interest rates and closing costs. VA loans are famous for their favorable terms, but they’re typically only available to those who have earned their access to the program through military service. That said, assuming a VA loan is different from taking one out. And you don’t have to be a service member or veteran to assume a VA loan – civilians with the right qualifications are eligible.
How to Assume a VA Loan
What does it mean to assume a loan? As NerdWallet explains, when you assume a loan, you basically step into the original borrower’s shoes. Instead of taking on the challenge of seeking out a new loan at today’s interest rate, you agree to take over an existing loan. You’ll pay the existing mortgage payment each month and be charged the same interest rate for the remaining life of the loan.
Pros and Cons of Assuming a VA Loan for Buyers
Assuming a VA loan offers some major advantages, but it also has the potential for drawbacks. Before making the decision, you’ll need to weigh the pros and cons carefully.
On the plus side, you’ll likely get a competitive interest rate. While that’s not always the case, interest rates tend to rise over time, so assuming a loan that was made when interest rates were lower enables you to pay the lender less for the privilege of borrowing money. As an added bonus, you can save a fair amount of money on appraisal fees and closing costs. Consider this: According to the VA, borrowers using a VA loan with no down payment for the first time pay a funding fee of 2.3 percent, and the fee rises to 3.6 percent for repeat users. In contrast, the fee for assuming a VA loan is just 0.5 percent.
Why might a borrower hesitate to assume a VA loan? As Military.com points out, you may need a hefty down payment to make the deal work. Remember, assuming a loan means taking it on without changing its terms. Making no changes means that you cannot roll additional costs into the loan, so if the sale price of the home exceeds the amount that’s still owed on the loan, you’ll have to come up with the difference as a down payment.
What Assuming a VA Loan Involves
Are you wondering how to assume a VA loan? The basic process is fairly simple, but there are some differences depending on whether you’re (1) a civilian or (2) a service member or veteran with your own VA entitlement. The Mortgage Reports offers an idea of what to expect:
- The VA loan must be current. If it isn’t, any amounts owed must be paid before closing.
- The buyer must demonstrate that they have the necessary income and credit to handle the loan in order to win approval for the assumption from the VA or a VA-approved lender.
- If the buyer is a civilian with no housing entitlement, the original borrower’s entitlement remains tied to the loan until it closes.
- If the buyer is a service member or veteran who wishes to use their entitlement, they may substitute their entitlement for the original borrower’s. This frees the original borrower’s entitlement, allowing them to use it elsewhere.
- The buyer must agree to assume all mortgage obligations.
- The buyer, the seller, or a combination of the two must pay the 0.5 percent funding fee.
- A Release of Liability form must be obtained from the VA. This document makes it clear that the original borrower is no longer liable for the loan and that the loan passes to the buyer with its original terms intact.
Whether you have specific questions about how to assume a VA loan or are seeking expert guidance on navigating the process of obtaining a home loan, PrimeLending: Manhattan, Kansas, can help. Contact us today to get started.