Normally, when homes are sold the existing mortgage is paid off. However, there are cases when the purchaser of a home can take over the existing loan payments. This is referred to as “assuming” the loan. Not all types of loans have this feature. Typically, it is adjustable rate mortgages that are assumable (and only after their initial fixed period is complete). However, VA loans are assumable even for fixed rate loans (FHA loans too, but that’s a writeup for another time). Following is some more information about VA loan assumability.
Assumable VA Loans
If the original loan was a VA Guaranteed Home Loan originated (closed) after March 1, 1988,
under certain circumstances, it is possible for a veteran to sell the property subject to the
assumption of the loan payments by the purchaser. The purchaser assuming the VA loan
payments does not have to be a veteran.
What’s the Appeal?
An assumable loan may be very attractive to potential buyers if current interest rates
are higher than when the seller took out the mortgage. The buyer can continue to make payments at the seller’s lower rate rather than at the higher market rate.
Is There a Downside?
There are potential risks and complications of an assumable mortgage to both buyer and seller.
- For the buyer, the assumable mortgage may not cover the full cost of the home. If this is the case, the buyer will likely have to pay the difference. That may mean a large down payment, or having to find additional financing (a second mortgage) to pay the difference between the assumable mortgage balance and the price of the home.
- For the seller, the seller may still be responsible for the loan repayment unless there is a Release of Liability (ROL) provided by VA. It should be made clear that even though the release may be approved, the veteran’s home loan benefit may not be restored unless the assumer is a veteran and willing to substitute his or her VA home loan entitlement.
- As a seller, if you transfer your loan without obtaining an ROL, you are responsible for the entire term of the loan, even if the assumer defaults. So don’t let that loan come back to haunt you by letting a stranger assume it.
How does the process work?
If the assumption is known at time of purchase contract, there should be a provision in the sales contract that the purchaser will assume all the obligations of the VA loan. The following stipulations apply:
- The buyer will need agree to assume the indemnity liability to VA, and that the sale will not be complete until the loan holder or VA approves the assumption.
- The buyer will need to be qualified by VA and/or the loan holder before the loan assumption can be approved.
- The existing loan must be current.
Hopefully that’s all the information that you need at this point. If you have any follow up questions please do not hesitate to contact us.