Last Updated on December 15, 2022 by Luke Feldbrugge
In a world where most mortgages are not assumable, you might wonder are VA loans assumable? The short answer is yes, they are. That puts you, as the seller with a VA loan, in a unique position. Giving the buyer the ability to assume your mortgage and buy your house in a climate of rising interest rates is a significant benefit. However, assuming a mortgage can get a little complicated, especially because you want to be able to protect your VA loan benefit.
What is an Assumable Mortgage?
What does it mean, then, to do a VA loan assumption? It means you can sign your existing mortgage and home over to someone else, and they will be the new owner of both house and mortgage. They will be responsible for paying the monthly mortgage payments and all the other things that are involved with owning a house, and you can move on to your next home. The buyer who assumes the mortgage can skip a lot of the paperwork that goes with a traditional sale, but the real benefit is being able to assume a mortgage with a lower interest rate than is currently available.
A couple of things are important to remember.
- Assumable mortgages are rare. Most conventional mortgages and home loans are not assumable. VA loans and FHA loans are some of the exceptions to that rule and are assumable.
- Much of the risk in an assumable mortgage situation is with the seller. You should take into account all of these risks if you are a home seller and are considering letting a buyer assume your mortgage.
The risks include:
- Risks to your credit if the buyer misses payments
- Risks to your VA entitlement (more on that below)
Who can Assume Your Loan?
The new buyer does not have to be a veteran or eligible for veterans benefits to assume your mortgage. There are certain advantages if they are, but anyone can assume your VA loan.
This is where we should take a step back and take assessment of what the VA loan actually is. The VA home loan program actually insures and guarantees your loan if you are an eligible veteran, but the money comes from a private mortgage lender who also must approve the loan. That private lender, who is probably your current mortgage company, must also approve the assumption of the existing loan based on the credit history and DTI ratio of the buyer.
That means your buyer will need to be able to prove they can handle the mortgage by demonstrating:
- A credit score of 620 or better
- A debt-to-income ratio below 41%
- Enough residual income for themselves and their family
The buyer must also agree that the house whose mortgage they will assume will be their primary residence. The private lender may need other documentation and proofs of employment and income, but in terms of assuming your mortgage, the ball is really in their court. At this point, it’s worth a mention that Home for Heroes can help connect you with a private mortgage specialist who is familiar with all the ins and outs of the VA mortgage loans (whether you’re a buyer or a seller).
If this is an “in-kind” assumption of the mortgage between a VA approved seller and a VA approved buyer, many of the VA loan benefits will transfer. In particular, an eligible VA buyer can substitute their entitlement for you on the mortgage.
Entitlement and Why You Should Protect it
We probably shouldn’t go any further without explaining the VA entitlement. On your Certificate of Eligibility, issued by the U.S. Department of Veterans Affairs, there’s a record of how much you are entitled to as a qualified veteran or active duty military member. It’s in a dollar figure, and it shows the size of the mortgage the VA will insure for you. The top of the scale is $647,000, so if you have a full entitlement, you can borrow up to that amount and the VA will insure the loan (remember, the money still needs to be approved by your private lender).
If you have a mortgage on your house with a total loan amount of say $300,000, and you have a full entitlement, then you have $347,000 left in your entitlement. If for example you wanted to buy a second home, you can use that leftover entitlement in your loan application.
If your mortgage is assumed by a civilian, that first entitlement is still on the books and that could limit what you could borrow in the future if you want the VA loan guarantee. In other words, the buyer now has your house and your mortgage, but your entitlement is permanently decreased, at least until the buyer pays off the whole loan. Keeping your entitlement as full as possible takes some work.
In the case of a VA-eligible buyer, they may also have an entitlement, and they can do a substitution of entitlement (theirs for yours). You would then go back to your full entitlement.
Assumable VA Loans: Figuring Out the Down Payment
Traditionally with VA loans, there is no down payment, but with an assumable loan transfer it gets tricky. Since the buyer is not technically getting a new loan but inheriting an old one, there shouldn’t be any down payment involved. However, if the seller has any equity in the house, he or she isn’t going to want give up that money when they sign over the mortgage.
Let’s do the math. You own a VA insured property worth $400,000 and you’ve been paying on it for a few years. Let’s say you’ve paid $50,000 toward that property and mortgage. You will want to recoup that money when you let the buyer assume the mortgage. Instead of a down payment, the buyer is going to have to come up with that payment of the equity instead of a down payment. In most cases, that’s a much bigger check, and the buyer may have to take out another loan to come up with your equity payback.
Now the buyer may have a big loan in addition to assuming the mortgage, introducing a whole new level of complexity and approvals from lenders.
Having an assumable mortgage has its benefits, but things can get very complicated very fast.
How a VA Assumable Mortgage Can Affect Your Credit
Maybe it goes without saying that having a buyer assume your mortgage can affect your credit, especially if the new owner starts missing payments or making late payments. That’s why, as a VA loan holder, you must get your mortgage lender to issue a “release of liability.” That’s a legal document that is just what it sounds like. Without it, the buyer can do a lot of damage to your credit score if they are late or miss payments on your mortgage. The release of liability is a VA requirement; there’s no room for negotiation on it.
VA Loan Funding Fee
In the case of a mortgage assumption of a VA guaranteed loan, the buyer must pay the VA Funding Fee. This kicks in whether the buyer is a veteran or a civilian. The funding fee keeps the VA loan program running and it’s sort of universal in most VA loan transactions (including the assumption). While the typical funding fee for a VA loan ranges between 1.4% – 3.6%. With the assumption, the fee drops down to 0.5% of the remaining loan amount, which is an extreme discount.
There aren’t too many exceptions to the funding fee, but there are a few military ones.
- A Veteran who receives compensation for a service-related disability
- A surviving spouse of a veteran who died in service or from a service-related disability
- An Active-duty service member who has been awarded the Purple Heart
- A Veteran with a memorandum rating saying they are eligible for compensation based on pre-discharge claim
For these military personnel and surviving family members, the funding fee is waived.
Assumable VA Loans Can Help During Foreclosure and Divorce
If life starts throwing curve balls at you, having an assumable mortgage can be a very good thing. If, for example, you are at risk of foreclosure on your house. Being able to transfer the house and the mortgage to someone else is much better than losing the house altogether. By avoiding the foreclosure, you can protect your credit score and your credit history. You might also be able to regain some of your equity from the buyer.
In the case of divorce, an assumable mortgage may give you some flexibility as you rearrange your life. Your spouse can assume the mortgage rather than both of you losing the house.
Change of Station
Active duty service members can relocate often as part of their service. With an assumable mortgage, you may not have to go through the hassle of constantly selling your old house as you move to a new one. Transferring your mortgage to another service member, one who also has VA loan eligibility, can be a good idea. It can reduce your risk to your entitlement and give a fellow service member a house with a reduced interest rate, that can benefit you both. As we mentioned before, many of the benefits of an assumable mortgage are on the buyer’s side, so this option can make your property more attractive to buyers.
Homes for Heroes: Every Step of the Way
Having a private lender who really understands the VA process and the intricacies of assuming a mortgage is going to be an important tool for you. You want an expert on your side. That’s where we come in. Homes for Heroes can connect you with one of our private mortgage lenders, folks who are committed to serving the needs of community heroes like you.
Homes for Heroes provides a whole range of help and expertise as you look for a home and try to find the best mortgage options. We connect you with:
- A real estate agent to help you find your home
- A mortgage lender to help you finance your home
- An inspector to help you make sure the home is sound and safe
- A title company to help you during the closing
Your Homes for Heroes team is there with you every step of the way. Then, at closing, the team gives you and your family a Hero Rewards check, usually averaging $3,000. It’s our way of thanking you for your service to the country and your community. It’s also a great way to get you started on the next phase of your life.