VA assumable home loans are a great option for those looking to become homeowners.
What is a VA loan assumption?
When a veteran (or active-duty service member) purchases a home with a VA loan and then transfers the mortgage to another buyer, it's known as an assumable home loan. The new buyer assumes full responsibility for the existing mortgage agreement. In other words, the buyer takes over the seller's current loan payment. At first glance, the low interest rate can be very attractive, but there can be some drawbacks to assuming a loan. As with any big financial commitment, it's important to understand exactly what you're getting into. To help, we've put together some essential pointers for those considering assuming a VA loan.
VA loan assumption details you need to know:
1. You need an experienced real estate agent & VA loan lender.
Experienced real estate agents and lenders are essential for a successful VA loan assumption. The process involves multiple intricate steps that require proficiency, so it's important to ensure your team is familiar with the ins and outs of this type of transaction. Taking on a VA loan assumption isn't recommended for those who lack experience in this area.
2. You'll need to meet financial benchmarks.
Lenders will need to verify that you are a financially responsible and reliable borrower. This will involve checking your mortgage history, income level, credit score, and debt-to-income ratio. Just like with any other bank loan, the lender needs to be sure that you can make timely payments on the loan.
3. Non-military buyers can assume too.
Contrary to popular belief, VA loan assumptions are not solely available to military buyers. Even civilians can benefit from taking over the loan of a veteran who is looking to sell their home.
4. The seller will ask you to substitute your VA loan entitlement.
It's important for buyers and sellers alike to consider VA loan entitlement availability when making a sale. Home sellers need to make sure that the Release of Liability and Substitution of Entitlement are both signed in order for them to be free from the loan, should the buyer default on it. This will also ensure that the seller retains their VA loan entitlement so that they can reuse it in the future.
5. An assumption means you take on all loan terms, not just the interest rate.
Be prepared to meet the exact terms of the original loan, including monthly payments and the life left on the loan. To make sure you understand each element of the contract, work with your real estate agent. Additionally, bear in mind that a VA assumption loan must be used to purchase a primary residence.
6. You'll probably pay a VA loan funding fee.
A VA loan assumption can be a great way to save thousands of dollars; however, it is important not to forget about the funding fee, which is 0.5% of the remaining loan balance. There are exemptions available for military members who have a service-related disability or a surviving spouse.
7. You may need to bring cash to the closing table.
Whereas a new VA loan does not require a down payment, this is not the case when assuming one. You will need to pay the difference between the selling price and the amount left on the loan as a down payment. For instance, if the existing mortgage is $500,000 and the house is being sold for $700,000, you will have to come up with an additional $200,000 that can not be financed.
While it can be beneficial to assume a loan due to various advantages such as lower interest rates, it might be difficult to find several hundred thousand dollars upfront - so you must evaluate whether an assumption really is worth it in your particular case.
A VA loan assumption can be a powerful tool for bringing your homeownership dreams to life. However, it is not always the best option for all buyers, especially if you're short on time or cash. It is essential to find experienced real estate professionals who can assist you in understanding what is required and ensure a smooth transaction.