Can a VA Home Loan Be Transferred to Another Person?

A VA home loan assumption allows a qualified buyer to take over an existing VA loan, including its current interest rate, remaining balance, and original terms. This process can be particularly beneficial for buyers, especially in a rising interest rate environment, as it may offer a more favorable mortgage rate than new loans. For sellers, offering an assumable VA loan can broaden the pool of potential buyers for their property. While VA loans are generally assumable, specific conditions and an approval process must be met for the transfer to occur.

Key Requirements for VA Loan Assumption

Assuming a VA loan requires the prospective buyer to meet specific financial qualifications, which are assessed by the loan servicer. The buyer must demonstrate sufficient income to cover the mortgage payments and other household expenses. Lenders evaluate the buyer’s creditworthiness, looking for a minimum credit score, which can range from approximately 580 to 620. The buyer’s debt-to-income (DTI) ratio is also a significant factor, representing the percentage of their gross monthly income allocated to debt payments. The VA advises lenders to scrutinize applications where the DTI exceeds 41%.

The assuming buyer must intend to occupy the property as their primary residence, aligning with VA loan program requirements. This occupancy rule ensures the loan continues to serve its purpose of facilitating homeownership. The existing VA loan must be current on all payments. Should the loan not be current, it must be brought up to date before the assumption can be finalized.

The buyer does not need to be a veteran to assume the loan. However, if the buyer is not a veteran, or is a veteran but does not substitute their own entitlement, there are implications for the original veteran borrower’s VA loan entitlement. The assumption also involves a VA funding fee, 0.5% of the loan balance, payable by the assuming party. Additionally, servicers may charge a processing fee.

If the home’s sale price exceeds the remaining loan balance, the assuming buyer must pay the difference as a cash payment to the seller. This amount represents the seller’s equity in the property. If the buyer lacks sufficient cash, they may seek secondary financing, such as a second mortgage, to cover this gap. When secondary financing is involved, the VA requires that it be subordinate to the VA-guaranteed loan, and its terms are factored into the buyer’s overall financial assessment.

The VA Loan Assumption Process

Once a buyer and seller agree to pursue a VA loan assumption, the process begins by contacting the loan servicer. The seller initiates this by notifying their lender of their intent to sell the home through an assumption. The servicer is responsible for processing the assumption and will provide the necessary application forms and a list of required documentation to the prospective buyer.

The buyer then submits an application package to the servicer, which includes financial statements, income verification, and authorization for a credit report. These documents allow the servicer to conduct an underwriting review to confirm the buyer meets all credit, income, and DTI requirements.

Following the servicer’s review, the application proceeds to underwriting, where an analysis of the buyer’s financial profile is performed. This step verifies that the buyer is a creditworthy party capable of assuming the loan’s responsibilities. The Department of Veterans Affairs (VA) mandates that loan servicers must process VA loan assumptions within a 45-day timeline. This regulatory change aims to streamline the assumption process, ensuring greater efficiency for both veterans and homebuyers.

Upon approval, both the buyer and seller will sign an assumption agreement, and the property title is transferred to the new owner during closing. At this time, the buyer pays the VA funding fee, any processing fees, and covers the difference between the sale price and the loan balance. For the original borrower, obtaining a release of liability absolves them from financial responsibility for the loan and protects their credit if the new borrower defaults. This release is granted by the VA after the assumption is approved and the buyer is deemed creditworthy.

Impact on Original Borrower’s VA Entitlement

The original veteran borrower’s VA loan entitlement is impacted when their loan is assumed by another party. Entitlement refers to the portion of the loan the VA guarantees to the lender, enabling veterans to secure favorable loan terms. When a VA loan is assumed, the status of this entitlement depends on the eligibility of the assuming buyer.

If the assuming buyer is also an eligible veteran and agrees to substitute their own VA loan entitlement for the original borrower’s, the original veteran’s full entitlement can be restored. This process allows the original veteran to use their full VA home loan benefit for another home purchase. Full entitlement restoration ensures the original veteran retains their purchasing power for future VA-backed loans.

However, if the assuming buyer is not a veteran, or is a veteran but does not substitute their entitlement, the original borrower’s entitlement remains tied to the assumed loan. This means that the portion of the entitlement used for the assumed loan is not available for another VA-backed home purchase. The original veteran’s ability to obtain another VA loan may be limited until the assumed loan is fully repaid or the entitlement is otherwise restored.

Without a formal release of liability, the original borrower remains secondarily liable for the loan even after it has been assumed, meaning their credit could be negatively affected if the new borrower defaults. Securing this release protects the original veteran’s financial interests. The VA’s goal is to protect the veteran’s benefit while also ensuring the loan remains a sound financial instrument.