Understanding the Assumability of VA Loans

What is Loan Assumability? 

Assumability refers to the ability of a borrower to transfer their mortgage loan to another person, allowing the new borrower to take over the existing loan terms. For VA loans, this means the new borrower steps into the shoes of the original borrower, taking over their interest rate, repayment schedule, and remaining loan balance.

Advantages of Assuming a VA Loan

1. Lower Interest Rates One of the primary benefits of assuming a VA loan is the potential for a lower interest rate. If the original loan was secured during a period of lower interest rates, the new borrower can benefit from these favorable terms, which might be better than current market rates. Prominus currently has two properties with assumable VA loans! One in Fate at 2.75% and the other in Krugerville at 4.50%.
2. Cost Savings Assumption can save the new borrower money on closing costs. While there are fees associated with the assumption process, they are generally lower than the costs involved in originating a new loan.
3. Streamlined Process The assumption process can be quicker and less cumbersome than obtaining a new mortgage. This is particularly advantageous in competitive housing markets where speed can make a difference.
4. No Need for a Down Payment In some cases, assuming a VA loan might not require a down payment, which can be a significant financial advantage for the new borrower.
5. Preservation of VA Loan Entitlement For the seller, allowing a VA loan assumption can help preserve their VA loan entitlement, which can be used again in the future if the new borrower is also a veteran or eligible borrower.

The Process of Assuming a VA Loan

1. Eligibility Check The first step is to determine if the new borrower is eligible to assume the VA loan. The new borrower does not need to be a veteran or a member of the military, but they must meet the lender’s credit and income requirements. Call Joey Smolensky, Loan Originator with Absolute Lending, as we has significant experience with VA loans and VA specific lenders.
2. Lender Approval Both the lender and the VA must approve the loan assumption. The new borrower will need to submit an application to the lender, who will evaluate their financial stability and creditworthiness.
3. VA Approval The lender will also coordinate with the VA to obtain approval for the loan assumption. This process ensures that the VA loan entitlement is properly managed and that the new borrower is a suitable candidate.
4. Transfer of Loan Terms Once approved, the loan terms are transferred to the new borrower. This includes the interest rate, remaining balance, and repayment schedule. The original borrower may also be required to obtain a release of liability, ensuring they are no longer responsible for the loan.
5. Fees and Costs There are fees associated with the assumption process, typically including an assumption fee, credit report fee, and possibly a funding fee. These costs are generally lower than traditional closing costs for a new mortgage.

Key Considerations

1. Release of Liability It is crucial for the original borrower to obtain a release of liability from the lender. Without this release, the original borrower could remain responsible for the loan if the new borrower defaults.
2. Impact on VA Loan Entitlement If the new borrower is not a veteran or eligible borrower, the original borrower’s VA loan entitlement may remain tied up in the assumed loan, limiting their ability to use the VA loan benefit again until the loan is paid off or refinanced.
3. Market Conditions The attractiveness of assuming a VA loan can depend on current market conditions. When interest rates are high, assuming an older loan with a lower rate can be particularly advantageous.
4. Legal and Financial Advice Both parties should seek legal and financial advice to understand the implications of the loan assumption fully. This includes reviewing the terms of the original loan and any potential liabilities.

The assumability of VA loans presents a unique opportunity for both sellers and buyers in the real estate market. For buyers, it offers a pathway to favorable loan terms and potential cost savings. For sellers, it provides a way to facilitate the sale of their property and potentially preserve their VA loan entitlement. Understanding the process, benefits, and considerations involved in VA loan assumptions can help both parties make informed decisions and take full advantage of this valuable feature.