Why You Should Assume A VA Mortgage Loan
If you find a home you want to buy that is currently financed with a VA Loan, you might want to consider an assumption.
This old "creative" technique for buying real estate is going to re-emerge due to rising mortgage interest rates, and could very well save some buyers tens of thousands of dollars over time.
Why You Should Assume A VA Mortgage Loan
For people who weren't buying homes 20+ years ago, you likely will not remember the process of assuming a loan.
Back in the old days, there were many assumable loan products, and some of them did not require any kind of qualifications at all. But those days are over (more on that later).
The primary reason that buyers will be considering a loan assumption is simple ... lower interest rates.
When mortgage interest rates rise, older assumable loans with lower interest rates will have value to buyers. For example, say you have a home financed with a VA loan with a 3.25% interest rate. When current mortgage interest rates go to 5% (not a crazy notion that this could occur in the next year or two), a buyer would much rather have the existing loan at 3.25% than get a new one at 5%. Think about the savings at each monthly payment!
To structure the transaction, the buyer will need a way to cover the difference between what is owed on the VA loan, and what the buyer will have to pay for the house. There are plenty of options here. But even if the answer is "bring cash," remember that most VA loans are for 100% of the home purchase price, so if the seller purchased 10 years ago or more recently, the value of the home might only be 20% or so higher than the existing loan balance. Many buyers choose a 20% down payment anyway.
Regardless, buyers will want to chase the lower interest rate, whether through paying cash, using a blended-mortgage option, or even by getting a 2nd mortgage or partial owner financing. There are solutions available if you work with a creative real estate buyer's agent!
Who Can Assume A VA Loan
Anyone can qualify to assume a VA mortgage loan, one does not have to be a Veteran. This benefits the service member as it makes their home easier to sell by increasing the size of the buyer pool. Of course, the buyer must still have sufficient income and have a high enough credit score to qualify for the assumption, just as the buyer would for a new loan as well.
The ability to assume a VA mortgage loan is roughly the same as to get a new loan, but a buyer should consider the assumption when it saves them money on the monthly mortgage payment.
Here are a few of considerations when assuming a VA loan:
- There is a VA funding fee that must be paid: 0.5% of the existing principal balance. Either the seller or the buyer can pay this fee. Of course, this fee is comparable to what the buyer/borrower would be paying to get a new loan too.
- If the person assuming the loan isn’t a veteran, then the veteran will lose their remaining entitlement benefits because the VA benefit stays with the mortgage, not the individual. This is important to know (as the Veteran) if you plan on using a VA loan on your next residence. And this is important to know (as the buyer) since you might have to motivate the seller to let you assume the loan.
- The great thing about the VA assumption is that it "novates" the seller (meaning the veteran is released from all liability for the mortgage after the assumption is complete).
- One small detail that is often overlooked ... there are no guarantees that the existing loan servicer will allow the assumption. Lenders are not obligated to approve loan assumptions. Considering the "bad press" involved with turning down a Veteran's benefit though, I'm not sure this will be an issue (at least not until the difference in past mortgage loan interest rates and new rates becomes significantly large enough).
Moving With A Purpose
The VA mortgage loan assumption is just one tool in a well-trained buyer agent's skill set that you can use to save money when you buy a home. Whether you are buying right away, buying a home in the next 6 months, or buying in a year or so, it is never too early or too late to meet with somebody who is thoroughly trained to help you when the time is right.
If you are planning a move within the next few years (or sooner), we would love to put you on the path to homeownership in a manner that will save you money. Simply drop me a note if you'd like to site down for a no-strings-attached exploratory meeting and we'll be in touch right away.
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