We get it – the market today is competitive and finding a good deal can feel like spotting Bigfoot – rumored to exist, but rarely seen. Higher rates are making VA loan assumptions a hot topic. Buyers and sellers are exploring this unique option to make homeownership more affordable. But what exactly is a VA loan assumption, and how does it work? Let’s break it down.
What Is an Assumable VA Loan?
An assumable VA loan is a mortgage that allows a buyer to take over the seller’s existing loan. This means you get to inherit their sweet interest rate, remaining loan balance, and repayment schedule.
VA loans, which are backed by the U.S. Department of Veterans Affairs, are assumable—a MAJOR advantage in today’s market where many sellers have locked in rates far below current levels. (Have we mentioned we love the VA loan?)
For example, if a seller has a VA loan with a 3.25% interest rate, the buyer could assume that loan instead of securing a new mortgage at a higher rate. That’s like getting a first-class plane ticket for the price of a middle seat in economy, winning!
Who Qualifies for Assumable Loans?
You might assume (pun intended!) VA loan assumptions are only available to veterans or service members, but that’s not always the case. Both military and non-military buyers can assume a VA loan. Here’s how it works:
- Veterans or service members with VA loan eligibility: If the buyer is also eligible for a VA loan, they can assume the mortgage and the seller’s VA loan entitlement.
- Non-military buyers: Civilians can assume a VA loan but cannot use VA benefits. The seller’s VA entitlement will remain tied to the property until the loan is paid off or refinanced. This can limit the seller’s ability to use their VA benefits for a future home.
What Does the VA Loan Assumption Process Look Like?
Spoiler alert – assuming a VA loan is not as simple as a traditional home purchase—it requires lender and VA approval. Here’s a step-by-step breakdown:
- Loan qualification: The buyer must meet the lender’s credit and income standards, typically requiring a credit score of at least 620 and a debt-to-income (DTI) ratio below 41%.
- VA approval: The assumption must be approved by the VA or the lender servicing the loan.
- Funding fee: VA loan assumptions require a 0.5% funding fee of the remaining loan balance.
- Transfer of liability: Once the loan is assumed, the buyer becomes responsible for the payments. However, if the buyer is not VA-eligible, the seller’s entitlement remains tied to the property.
What Is the Assumption Gap?
The assumption gap is a key factor to consider in VA loan assumptions, aka the fine print. Since the buyer takes over the seller’s remaining loan balance, they must cover the difference between the purchase price and the existing loan.
For example:
- A home sells for $400,000, but the seller’s VA loan balance is only $300,000.
- The buyer must cover the $100,000 gap through cash, a second loan, or other financing methods.
This upfront cost can be a barrier for some buyers, especially in competitive markets with higher home values.
Is a VA Loan Assumption Worth It?
In today’s market, VA loan assumptions can be a smart financial move—especially when the seller’s interest rate is significantly lower than current rates. However, buyers need to consider the assumption gap and ensure they have the necessary funds.
For sellers, offering a VA loan assumption could make your home more appealing to buyers. Just be cautious if the buyer isn’t VA-eligible – it could leave your VA benefits tied to the property longer than expected, limiting your ability to use them for future homes.
The Bottom Line for VA Assumptions
VA loan assumptions offer a rare opportunity for buyers to secure a low interest rate in an environment with higher rates. While the process involves a bit of red tape and potential cash gaps, the long-term savings can be well worth it.
And hey, in this market, who wouldn’t want a lower mortgage payment? You can learn more about the assumption process with our VA Loan Specialist here.