One of the more under-the-radar benefits of VA loans is that they’re assumable.
An assumption is generally defined as a purchase transaction where the purchaser takes over the liability of an existing mortgage from the seller.
Instead of selling your home, you may be able to have another person essentially take over your mortgage and your interest in the property. That includes your loan balance, your interest rate and your monthly mortgage payment.
Loan assumptions and traditional home purchases differ in some key ways. Not all VA lenders allow for assumptions. Assumptions also have the potential to put your VA loan entitlement and your credit at risk.
But they can offer VA homeowners an attractive bargaining chip in a rising-rate environment.
Let’s take a closer look.
Potential VA Loan Assumption Challenges
In a typical purchase transaction, the buyer is getting a mortgage loan to purchase the home, and the seller is using the proceeds of the sale to repay their loan in full, shifting the financial obligation for the property solely to the new owner.
The seller can also look to restore their full VA loan entitlement once they’ve repaid that original loan in full.
Things can look different with a loan assumption.
As with a typical purchase, lenders will vet the credit and finances of the person assuming your loan. Unlike a home sale, your legal liability for the debt doesn’t automatically disappear upon completing an assumption.
Homeowners have to ask for and obtain a release of liability from the lender or servicer. Without a release of liability, VA homeowners could take a major credit hit if the person assuming their loan later makes late payments or defaults on the mortgage.
Using VA Entitlement After an Assumption
Another huge consideration is VA loan entitlement. If the person assuming your loan is a veteran with sufficient VA loan entitlement, then you can ask them to formally substitute their entitlement for yours on that mortgage. Otherwise, the entitlement you utilized to purchase the home will remain tied up there until the loan is fully repaid.
Failing to get a Substitution of Entitlement can limit your $0 down purchasing power when it comes time to reuse the VA loan benefit. What’s worse is that veterans would lose that portion of their entitlement entirely if the assumer later defaults on the loan.
Potential VA Loan Assumption Benefits
Those are some of the key considerations and potential concerns. In terms of the potential advantages, having an assumable loan can be a big help if you’re looking to sell during a time of rising interest rates.
Let’s say you bought a few years ago and got a rock-bottom interest rate. But if rates have been on the rise since you landed that VA loan, anyone wanting to go out today and get a loan to buy your home is getting stuck with a higher interest rate than what you have -- unless they can just assume your loan. In that case, the buyer gets to take advantage of the lower rate you locked into years ago.
Most of the closing costs associated with a VA purchase aren’t part of an assumption, either. But the person assuming the loan does pay a funding fee of 0.5 percent of the loan balance. That fee goes directly to the VA and helps keep the loan program running for future generations of military buyers. Veterans who would normally be exempt from the VA Funding Fee are also exempt from this assumption fee.
The key with a loan assumption is making sure to safeguard your VA loan entitlement and your financial future. VA loan assumptions aren’t incredibly common, but the ability to have someone assume your loan is a potential benefit when the time comes to sell. And it’s a benefit you won’t find with most conventional mortgages.
Talk with your lender or servicer if you have questions about VA loan assumptions.