Veterans Affairs Loan Assumption: How It Works for Buyers and Sellers

One of the many advantages of a Veterans Affairs (VA) loan is that it is assumable, meaning another borrower can take on your existing VA loan. The new borrower may not even need to be eligible for a VA loan themselves. This is a unique feature in a mortgage, and it can create some compelling opportunities for veteran homeowners to consider.  

In this article, we will explain how VA loan assumptions work, their benefits and drawbacks, and what’s required to assume a VA loan.

What is VA Loan Assumption?

VA loan assumption is generally considered a nice benefit for VA loan borrowers. It’s the process by which the original VA loan holder transfers ownership of their home and remaining mortgage to a new buyer. As stated above, this new buyer does not need to meet the same VA requirements that the original borrower met.  

They can be an eligible veteran, active-duty service member, or surviving spouse, but they can also be any other creditworthy buyer who meets your lender’s requirements. This can help the seller attract more buyers, as VA loans often have lower interest rates than conventional loans.  

When a VA loan is assumed, that is considered a Release of Liability for the seller. The homebuyer will assume responsibility for the home and take on the same mortgage payments for which the seller was previously responsible. If your lender is unwilling to recognize the ROL, it may be worth reconsidering your sale, as you could be held liable for late payments from the borrower.

Potential Benefits of VA Loan Assumption

Assuming a VA loan can be greatly beneficial to the buyer and the seller. Depending on current interest rates, the buyer may end up with a lower rate than they could find in a conventional loan. There may still be some closing costs, but the VA funding fee is only 0.5% of the remaining loan amount, which is even lower than the regular fee.  

If you’re the seller, you can restore their entitlement during this transfer as long as the loan assumer is a VA loan eligible borrower who is willing to substitute their entitlement for yours. VA loan assumptions can also close more quickly than new loans because they don’t require the creation of a new loan. Note, though, that the process can drag on a bit longer when the VA must approve the assumption.

Risks During VA Loan Assumption

One major risk for sellers is that your entitlement could end up staying with the original loan if the assumer is a civilian or a veteran who does not want to substitute their entitlement. So, in the same way that the more open eligibility for VA loan assumptions can widen your pool of buyers, it can also shrink it if replenishing your entitlement is important to you.  

If you don’t get an entitlement substitution, your entitlement will not be restored until the assumer has paid off your original loan. Additionally, if you do not get a substitution, and the assumer defaults on your prior loan, your entitlement will not be restored until the VA’s loss has been repaid in full. This is true even if the VA says the default was not your fault and the debt was waived.

What Are the Requirements to Assume a VA Loan?

On the lender side, VA statutes and regulations require that an assumption be approved if: 

• The loan is current at the closing of the sales transaction. 

• The assumer is contractually obligated to buy the home and assume full liability. 

• The assumer is creditworthy under VA’s credit and underwriting standards.  

The lender will require paperwork from the borrower verifying their income, debts, and creditworthiness. If the assumer is planning to substitute their entitlement, they will need to produce a Certificate of Eligibility to determine whether they are VA loan eligible and they have enough entitlement for the substitution.  

The buyer will need to pay the 0.5% VA loan assumption fee, which cannot be financed into the loan, and they will need to pay the difference between the home’s sale price and the existing mortgage balance.  

The person assuming the VA loan may also be charged with an assumption processing fee no larger than $300 if the lender has automatic authority, or $250 if the VA must provide prior approval. Additionally, things like credit reports, recording fees and taxes, applicable taxes, hazard and flood insurance, title examination and title insurance may need to paid for by the assumer.

VA Loan Assumption Process

As outlined by the VA, the VA loan assumption process generally looks like this if your loan servicer has automatic authority: 

1. Buyer and seller submit an application for the assumption.  
2. Lender will undergo their loan processing and underwriting processes.  
3. Within 45 days of the receipt of the underwriting package, the servicer must notify the buyer and seller of the approval or disapproval of the assumption.  
4. If the assumption isn’t approved, the buyer and seller have 30 days to appeal to the VA. The VA will issue their decision within 10 days of the appeal. The loan servicer will notify you within 7 days of the VA’s decision.  
5. If approved, close the loan. When the VA is involved in approving decisions, the loan must close within 30 days of the VA’s decision.  

This is a simple overview of the process. Of course, there may be additional steps required by your lender, so be sure to speak with them for a full understanding of how they approach VA loan assumptions and their typical timelines.

Final Thoughts

VA loan assumption can be a great benefit for both sellers and loan assumers when it aligns with their financial goals. It can sometimes help a borrower secure a lower interest rate than they might find elsewhere on the market and comes with a smaller VA funding fee.  

The seller can make their home a more attractive option for borrowers for that reason, and if they sell to an eligible veteran, they may be able to replenish their VA loan entitlement through a substitution.  

If you are interested in allowing a homebuyer to assume your VA loan, speak with your loan servicer to learn about their process and requirements.