VA loan assumptions, the good, the bad, and the logistics behind transferring a VA loan. 

 Today we’re going to dive into discussing VA loan assumptions. There are five major objectives. 

1. What is an assumable loan?
2. Who qualifies for assumable loans?
3. What is the process for a VA loan assumption? 
4. What is the assumption gap? 
5. What are three key takeaways that you can take from this presentation to better understand VA loan assumptions? 

 What is an assumable loan?

An assumable loan is when a willing buyer assumes and becomes responsible for a willing seller’s loan. So think of it this way. I got my loan in 2020 or 2021, and my interest rate might be high 2% or low 3% range. You now are in an environment where interest rates might be 5%-7%,  and you have the ability to assume the the seller’s lower interest rate.

In an environment  when rates are increasing, it can be extremely valuable. So just think of it as you taking over the loan of a seller who might have a lower interest rate.  

Who Qualifies for an Assumable Loan?

Government loans have the ability to do assumable loans. That’s VA loans, USDA loans and FHA loans. That’s typically what we see today. Now, from a buyer’s perspective, there’s something to keep in mind. In general, you still have to qualify for that loan.

If you have a loan and you’re wanting someone to assume it, you can’t just give it to your good friend or cousin that has no job and can’t qualify for a mortgage in the first place. Buyers still have to qualify. 

The loan must cover your primary residence

You must intend on using the home as your primary residence when assuming the loan from the seller. All assumable loans can be assumed by veterans or non-veterans, USDA loans, anyone could  essentially assume that as long as they qualify. Same thing with a FHA loan. 

What a seller should know about an assumable loan

There is a big difference between other assumable loans that you want to keep in mind if you’re ultimately doing a VA assumable loan as a seller. You want to make sure it’s with another veteran, and then you really need to make sure they do what’s called that substitution of entitlement. If the buyer assuming the loan does not qualify for a VA loan, your VA entitlement could be held up and that could bog down and prevent you from utilizing the VA loan.

In most cases we see assumable VA loans being assumed by other veterans and having that substitution so the seller of that home can go out and have their full VA entitlement to another home with their VA loan. 

The assumption process

What does it look like? Let’s say I’m a veteran. I listed my home for sale that I bought in 2020- 2021 with a nice low interest rate. You, a buyer, are also a veteran and you’re gonna assume my loan. We think we have a good plan here. What do we need to do? 

The process for doing a VA loan or doing a loan assumption in general, there’s three major things you wanna take into account.

Number one, you want to follow up with the seller’s servicer to make sure that you can actually do the assumption. Government loans (VA FHA USDA) typically have that as just part of the loan that you can do assumptions, but there might be some extraneous reasons why you can’t do it. So you need to call up that servicer to make sure.

The second thing you want to do is make sure that you have an assumable purchase contract, Not just a standard purchase contract that you typically see for regular homes. You just want to document that you’re doing an assumable loan.

The last aspect in the whole process of doing a VA loan assumption is that you wanna make sure the buyer gets the servicer assumption approval.This is after the buyer has been approved with the servicer to make sure they can assume your loan. The need to go through underwriting to make sure that they can assume your  VA loan.

So once you get those three steps in order,  you typically are gonna have the ability to close on that assumption.  It typically takes anywhere from 90 – 120+ days to have  VA loan assumption done. Especially in this environment when assumptions are rare.

Now, servicers are getting hit with quite a few of these requests. Be ready for timing delays. 

One big aspect we want to talk about with assumptions is what’s called the assumption gap.

I can go assume Johnny’s VA loan, his interest rate could be around 3% and right now rates are a bit higher. That’s massive savings and that is true but you have to take into account, the assumption gap. The assumption gap is calculated when you take the sales price and you deduct the mortgage balance that you’re going to be assuming, and that is your assumption gap. This is the amount that the buyer would need to bring to closing.

So let’s use an example. Sellers listing a home for say, $500,000. Their loan balance is $400,000. You can assume their $400,000 VA loan at that 3.5% interest rate. It could be a 4%, 5% interest rate. If rates are higher. You wanna assume it.

 Point is, you can assume that $400,000 part and take that payment on, but that remaining $100,000, remember it was for sale for $500,000. You have to bring that to closing. If you’re smart and already kind of thinking ahead like me, I might be like, okay, cool. Hey Evan, is it possible to take that and all of a sudden still do 0% down VA loan and  add that into the loan somehow?

 Typically, no, that’s not gonna be something that can be done. Think of it this way.  You have to take out a second mortgage technically because that loan that you’re assuming is your first mortgage, extending that loan balance. Lenders aren’t gonna all of a sudden say, oh, hey, we’ll give you another a hundred thousand at that super low interest rate.

Doesn’t happen, so you gotta get a second mortgage for that one, which going to 0% down with a second mortgage, even with VA loans. That’s a tough deal to have done. What we see some folks do is they might take out a different loan somewhere else, but be ready that could impact your potential ability to qualify for that loan.

Or let’s say they’ll sell something. They might take out different funds from savings, retirement stuff to make sure they can make up that assumption gap difference. So it’s possible to do that. Just know that there’s just. More consequences to do it. It’s not always that easy. So that assumption gap ends up being often a showstopper for folks, especially if the home was bought years ago and all of a sudden it’s appreciated 20%, 30%, 40%.

Because now that could literally be hundreds of thousands of dollars being needed to be brought to the closing table. And sometimes that’s just a tall order. However, I’ll say silver lining. If you got the money, wonderful for that. But then also on top of that, let’s say they just bought the home a year or two ago and   those rates were a percent better or whatnot, that actually might be assumable and there might not be much brought to the table and you even sometimes gotta  watch out where the loan balance could be higher than the sales price and you gotta be aware if it’s potentially underwater.

Those are scenarios you don’t want to be in, so just be aware. Assumption gap is the sales price minus the loan balance. You need to be prepared to bring that to closing in some way, shape or form. And know that if you’re gonna take out loans on that, that could potentially jeopardize your qualifications for that mortgage of assuming the loan.

So that’s assumption gap. Keep it in mind. Big thing to remember.  Now we’re gonna go into three key takeaways. If you forget everything else. Just at least remember this. You got the basics of the math assumption gap, but there’s three major  key takeaways to think about, and that is number one, you wanna find out and make sure that the seller’s servicer can do a VA loan assumption in the first place.

Just remember that, Hey, we gotta go there first to make sure we can get this done. Call the servicer. It’s typically not their original lender they’re working with. It’s who they mail their checks to. You wanna make sure they’re gonna be able to work with this and get a general idea on that timeline.

Number two, you wanna make sure that that buyer qualifies for a VA loan because they’re gonna have to qualify to make sure they can take over your payment. So if you’ve got someone coming to you going, Hey, I would love to assume your loan.   Ask them, are you pre-qualified already? ’cause that can help give you some indication of if they’re in good shape.

 So just remember, they still got to qualify. You can’t just give it to your second best friend’s cousin. . You gotta be ready for them to qualify. Then lastly, give yourself time. Point number three, the big one. Give yourself time and grace in doing this process. It takes time to get it done, especially right now as this is all very new   for servicers to work with that we haven’t seen in years.

 So just know that it could take a lot of time to get it done. And that means you wanna make sure that you have this in your contract so that for buyers, you give yourself plenty of time. And for sellers, you protect yourself from them taking too much time. So keep those considerations in mind. As you’re going through this VA assumption process now, how can we help you ultimately?

Really that prequalification part is where we’ve come in and helped folks before, and let’s say you’re a seller and you’re wanting to list your home and offer that VA assumption now while the servicer’s, the one that’s going to have to qualify that person and do their underwriting form.

Sometimes that can take a lot of time. Well, working with a lender who specifies in VA loans, what we do specifically, heavy active duty military VA loans. He’s working with someone to help get ’em pre-qualified, can give you some rough indication of if this will be good moving forward. Last thing you wanna do is start that assumption process.

Get 30, 60 days in and find out they can’t even qualify. And let’s say you’re PCSing making that move across country and you just lost out on  that home sale. That could be a big issue. So getting buyers pre-qualified up front can really help. The other thing is if you need additional resources, we’re here for you.

WeVett Home Loans. Again, we focus specifically on the VA loan. Active duty military is our primary focus. We love working for you. We hope this information helps you get out there and have more success with the VA loan. Take care.