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What is the Assumption Gap?

Very simple. You take the sales price and you deduct the mortgage balance that you’re going to be assuming, and that is your assumption gap.

And the buyer has to bring that 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 that $400,000 VA loan at that nice three and a half, whatever percent interest rate it is, we’re just lower than what it is, right? It could be a four percent, five percent interest rate.

If rates are higher, you won’t assume it.

Point is, you can assume that $400,000 part and take that payment on, but that remaining hundred thousand, remember, it’s for sale for $500,000 – you have to bring that to closing.

If you’re smart and already kind of thinking ahead, I might be like, “Okay, cool. Hey, Evan, is it possible to take that and all of a sudden still do zero percent down VA loan and add that into the loan somehow?”

Typically, no, that’s not going to 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 going to all of a sudden say, “Oh, hey, we’ll give you another hundred thousand at that super low interest rate.”

Doesn’t happen.

So you got to get a second mortgage for that one, which, going to zero percent 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 percent. Because now that could literally be hundreds of thousands of dollars being needed to be brought to the closing table.

And sometimes it’s just a tall order. However, 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 then sometimes got to watch out where the loan balance could be higher than the sales price and you got to 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 going to take out loans on that, that could potentially jeopardize your qualifications for that mortgage of assuming the loan.

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2024 VA Home Loan Guide

VA Guide

This short guide is designed to provide you the most important details of the VA Loan in an easy-to-use format. Print it out and read at your leisure.

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