Can an LLC Assume a VA Loan?

A common question for property owners and prospective buyers considering business structures is whether a Limited Liability Company (LLC) can assume a VA loan. This article clarifies VA loan assumption, explains why LLCs are generally excluded, and outlines legitimate pathways for an LLC to acquire a property with a VA loan history.

Understanding VA Loan Assumption

VA loan assumption involves transferring an existing VA loan obligation from one borrower to another. The new individual takes over the original loan’s terms, including its interest rate and remaining balance. This can benefit the assuming party, especially in a rising interest rate environment, by securing a lower mortgage payment than a newly originated loan.

To assume a VA loan, several requirements must be met. The lender must approve the new borrower, evaluating their creditworthiness, income, and debt-to-income ratio. Lenders typically require a credit score around 620 or higher, with a debt-to-income ratio generally below 41%. The Department of Veterans Affairs (VA) also requires the assuming party to personally occupy the property as their primary residence, usually within 60 days of closing. This occupancy requirement is fundamental to the VA loan program’s purpose.

The assuming party is typically responsible for a VA funding fee, which is 0.5% of the loan amount. Certain individuals, like veterans receiving compensation for service-connected disabilities, may be exempt. The original veteran borrower should obtain a release of liability from the VA. This frees them from future responsibility and can restore their VA loan entitlement. Without a substitution of entitlement by an eligible veteran, the original veteran’s entitlement remains tied to the loan, potentially limiting their ability to use the VA loan benefit again.

Why LLCs Cannot Directly Assume VA Loans

An LLC cannot directly assume a VA loan due to the inherent nature of the VA loan program. VA loans facilitate homeownership for individual eligible veterans, servicemembers, and their spouses, specifically for purchasing or refinancing a primary residence. The VA guarantees these loans to private lenders based on the individual’s personal eligibility and intent to occupy the property.

The most significant barrier for an LLC is the strict occupancy requirement. An LLC is a legal entity, not a natural person, and cannot physically occupy a property as a primary residence. This personal occupancy is a non-negotiable condition for VA loans, ensuring the program serves its intended purpose. VA regulations and lender policies explicitly prohibit business entities from meeting this residency criterion.

VA loans involve personal liability for the borrower. The individual veteran who obtains a VA loan is personally responsible for the debt. An LLC, conversely, provides liability protection to its owners, separating personal assets from business debts. This conflict between personal liability and limited liability prevents direct assumption. The Department of Veterans Affairs and most private lenders prohibit direct loan assumption by business entities. These entities do not meet the individual borrower and occupancy criteria. An LLC does not possess VA loan eligibility or entitlement, which are benefits extended only to qualifying individuals.

Pathways for LLCs to Acquire Property with a VA Loan History

While an LLC cannot directly assume a VA loan, legitimate methods exist for an LLC to acquire a property with a VA loan history. These pathways involve addressing the existing VA loan properly, rather than transferring it to the LLC. The core principle is that the VA loan is either paid off or refinanced, removing the VA lien before the property transitions to LLC ownership.

One approach involves the original veteran borrower refinancing their VA loan into a conventional loan. This new loan can be in the veteran’s personal name, or if the property is for investment and the lender permits, obtained directly by the LLC. Once the VA loan is satisfied through refinancing, the property is free of the VA lien, and the veteran can transfer the title to the LLC. Refinancing involves standard closing costs, such as origination fees, appraisal fees, and title insurance, typically ranging from 2% to 5% of the new loan amount.

Alternatively, the veteran can sell the property to their LLC. This operates like a traditional real estate sale, where the LLC secures its own new conventional financing. This new financing, such as a commercial loan or investment property mortgage, would pay off the existing VA loan at closing. The LLC undergoes a separate underwriting process, with loan approval based on its financial standing and the property’s investment potential. This method extinguishes the VA loan, allowing the property to be acquired by the LLC under a new financing structure. In both scenarios, the VA loan is not assumed by the LLC; instead, it is resolved, and the property becomes eligible for transfer to the LLC.