Benefits of VA Loan Assumption & How to Assume a VA Loan

Benefits of VA Loan Assumption

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There’s one benefit that veterans and active duty military members have probably heard about, but might not know how to use. 

What is VA loan assumption? 

When mortgage rates are high, the ability to assume someone else’s mortgage (loan assumption) is a massive opportunity. You might get the chance to take a lower interest rate, plus a lower monthly payment.

If you want to pursue a VA loan assumption, you’ll be taking over an active mortgage from a military veteran. That doesn’t necessarily mean you need to be a veteran yourself, but it does mean you need to get familiar with this process. 

A traditional home buying process and a loan assumption are not the same. In a few minutes, you’ll know about VA loan assumption pros and cons, plus the steps it takes to use it to your advantage.  

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Here’s our short guide to VA loan assumption - Image via GotCredit

What is a VA Loan Assumption?

When veterans, active duty service members, or their families want to take a less-expensive road to homeownership, VA loans are there. They often have fewer requirements, more competitive interest rates, and lower monthly payments.

Knowing that, let’s imagine that someone with a VA loan wants to sell their property. That homeowner can turn their VA loan into an attractive selling point. The new buyers would inherit the terms of the mortgage, interest rates, monthly payments, and whatever balance remains. 

Who can start a VA loan assumption?

Veterans, active military service members, and their family members can assume a VA loan and inherit the savings. Also, non-military, known as “civilians”, can assume VA loans.

What Are the Benefits of VA Loan Assumption for You?

Assuming a VA loan has potential benefits, but to be specific, cost saving benefits. Not all VA loans that you come across with have the same upsides, so you should evaluate them with a knowledgeable local realtor

Here are some potential advantages to expect:

Monthly Savings

When rates are high, a VA loan assumption could be your way to avoid them. When you inherit the loan, you could be signing on for a much lower rate from months or years in the past. In June 2023, Ginnie Mae’s data showed that almost 90% of VA homeowners had mortgage rates below 5%. 

The same study showed that over 75% had rates below 4%, and over 43% were below 3%.

Those few percentage points could create affordability, or at the very least, huge savings for home buyers.

This cost-saving benefit is impossible to understate. It could provide a monthly mortgage payment that’s hundreds or thousands of dollars cheaper than a traditional payment.

Lower Fees & Other Costs

Compared to run-of-the-mill mortgages, a VA loan could have significantly lower fees and costs. For example, closing costs are usually not included in an assumption. 

A funding fee of 0.5% is part of the assumption, but this goes towards a great cause. 0.5% of the loan balance is paid by the home buyer assuming the VA loan, which is goes directly to the VA. This kind of fee goes towards keeping the loan program running, benefiting future generations of American military service members and their families.

Veterans or other eligible persons who would be exempted from the VA Funding Fee are exempted from this assumption fee.

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VA loan assumption can come with serious upside - Photo by Towfiqu barbhuiya on Unsplash

Are There Any Downsides to VA Loan Assumption?

Nothing good is totally free of costs or pitfalls. We’ll inform you about the things that every homebuyer should know about assuming a VA loan.

Paying the Homeowner for Their Equity

If you signed over a VA loan that had already been partially paid off, you’d inherit the previous homeowner’s equity. That would be too good to be true, wouldn’t it?

In fact, it is. Here’s what usually happens:

Let’s assume a VA loan in California and the homeowner has $250,000 of their loan remaining on a home they listed for $500,000. That means that whoever is assuming the loan is going to need to pay for that privilege, likely around $250,000. It wouldn’t make sense for the homeowner if the new buyer didn’t pay for the equity.

Whether you pay this extra cost at closing time or obtain financing for it, that’s going to decide whether assuming a loan makes sense or not. Selection of properties and expert negotiation methods can pave the way forward - and local realtors always have both.

A Downside for VA Loan Entitlement

When a VA loan is assumed by a civilian, the VA homeowner can lose a portion of their entitlement. What that means is, they won’t have some of their benefits, such as 0% down purchasing power. 

However, if the VA homeowner formally substitutes their entitlement for another, that issue is sidestepped. The veteran assuming the VA loan must have enough entitlement to substitute.

A Beautiful Home Exterior

A VA loan assumption comes with a few pros and cons - Photo by Dillon Kydd on Unsplash

How Do You Assume a VA Loan?

You’ll want to start by finding a home with a VA loan that can be assumed. Realtors are the best resource in this case. Sifting through listings and checking new properties on the market is no small task.

In most cases, properties with VA loans (or FHA loans) are assumable. As for conventional mortgages, that’s usually not the case.

The Veterans Association has quite broad assumption guidelines, but lenders may have some of their own requirements, like a certain credit score, debt-to-income ratio, asset level, and employment verification. 

Whenever you assume a VA loan, you’ll need to work with the original lender or servicer. That will come with it’s own list of guidelines and potentially, a unique set of requirements.

When you’re ready to start scouting for VA loans to assume, check in with the people who’ve done this before. Make a call or send a message to your local realtors. They’ll find the properties on the market which have VA loans you can assume to reap the rewards.

More Questions? Follow-up With Us!

If you have more questions about what to expect from the markets around the Bay Area, don’t be afraid to reach out to us today. Our experts are experienced in all property types and the entire San Francisco Bay Area, and we can help you to find what you need to know today.

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