They say the way to keep from making assumptions is to ask questions. At Hawaii VA Loans, we like to anticipate your VA loan questions before you ask them. So what is VA loan assumability? Find out the positive and negative aspects of assuming a VA loan, and how the process works when selling or buying.
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.
The Summary on Assumable VA Loans
If the original loan was a VA Guaranteed Home Loan that closed after March 1, 1988, it is possible for a Veteran to sell the property subject to the assumption of the loan payments by the purchaser. Furthermore, the purchaser assuming the VA loan payments does not have to be a Veteran.
The Pros of Assuming a VA Loans
Some assumable loans may indeed be an attractive way to buy a home. Especially 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.
- Buyers can save money on closing costs and appraisal fees.
- The funding fee for a VA assumption is less than the funding fee for a regular VA loan (.50% of the loan balance).
The Cons of Assuming a VA Loan
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.
- The seller may still be responsible for the loan repayment unless there is a Release of Liability (ROL) provided by the VA.
- 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.
How Does the VA Loan Assumability 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 to agree to assume the indemnity liability to the VA. The sale will not be complete until the loan holder or the VA approves the assumption.
- The buyer will need to be qualified by the VA and/or the loan holder before the loan assumption can be approved.
- The existing loan must be current.
Thus, VA loan assumability is a pretty interesting way to make a purchase that needs special attention. Make sure you’re working with a VA Loan Specialist who can walk you through the process. If you have any follow up questions, please do not hesitate to contact us at 808-792-4251.