Buying a home is a major milestone for many people. It can also be a daunting process. Rising housing prices are requiring homebuyers to look for ways to save money. One option that has garnered attention in recent years is assuming a mortgage. A mortgage assumption allows buyers to take over the existing loan on a property. However, there are challenges that homebuyers should be aware of in their quest to buy a home via VA loan assumption.
The first challenge is that the assumed loan amount is often much lower than the purchase price of the home. This means that:
- Possible down payment required — A down payment or some other form of financing will be needed to make up the difference.
- Could make qualifying more difficult — Depending on the size of the down payment required, this can increase the total cost of the home purchase. Thus, it can make it more difficult for some buyers to qualify for the loan.
- Difference must come out-of-pocket — Unfortunately, traditional mortgages and VA loans cannot be used to make up the difference between the price of the home and the assumed loan amount.
The second challenge that is assuming a mortgage means that no direct lender will be involved in the process. Instead, the buyer and sellers will be responsible for the following:
- The buyer will work directly with the seller to transfer the loan to their name. This is a complex process that requires a great deal of coordination and communication between all parties involved.
- In the case of a VA loan, the sellers will work with their current loan servicer and the VA department.
- The buyer will also work with the VA to complete the assumption approval process.
The third challenge in assuming a VA loan is the VA loan eligibility of the original homeowner / Veteran borrower. Two scenarios can occur:
- If the loan is assumed by a non-Vet or someone without remaining VA entitlement, the original borrower’s entitlement remains encumbered by the assumed loan. This can severely limit their ability to use the VA loan in the future, as long as the assumed loan continues to have a balance.
- If an eligible Veteran assumes a VA loan, that new buyer can swap entitlement with the seller / original borrower.
Major Benefit of a VA Loan Assumption
The most significant benefit of assuming a mortgage is the potential for a lower interest rate. If the interest rate on the existing loan is lower than current rates, buyers can save a considerable amount of money over the life of the loan. However, it’s important to be aware of the challenges and potential risks involved in this process. Buyers will need to do their research, work closely with the seller, and be prepared to come up with a down payment. Yet, careful planning and a thorough understanding of the process can make assuming a mortgage a viable option for a lucky homebuyer.
If you have any questions about a VA loan assumption, please do not hesitate to contact us at 808-792-4251. Interested in using your VA home loan benefits to become a Hawaii homeowner? Fill out our secure online loan application and we’ll get in touch with you!