Can Someone Assume a VA Loan?

A VA loan, guaranteed by the Department of Veterans Affairs, offers a unique benefit known as assumability. This means a qualified buyer can take over the existing mortgage from the current homeowner, inheriting the remaining loan balance, interest rate, and other terms of the original loan. This process differs from obtaining a new mortgage, potentially offering advantages for both buyers and sellers, particularly in fluctuating interest rate environments. However, assuming a VA loan involves specific conditions and a formal process that must be carefully navigated.

Requirements for Assumption

The prospective buyer (assumptor) must meet eligibility criteria established by the lender and the Department of Veterans Affairs. This includes demonstrating financial stability, similar to a new mortgage. Creditworthiness is a primary consideration, with lenders looking for a credit score of at least 620 to 640.

Income and debt-to-income (DTI) ratio are also evaluated to ensure comfortable mortgage payments. Lenders prefer a DTI ratio below 41%, and the assumptor must demonstrate sufficient residual income after housing and existing debts. These assessments confirm the assumptor’s ability to fulfill loan obligations.

The existing VA loan must be in good standing and not delinquent. The original lender or servicer must approve the assumption after reviewing the assumptor’s qualifications. While not all VA loans require the assumptor to be a veteran, the property must be occupied as their primary residence for the assumption to proceed.

An assumption involves a VA funding fee, typically 0.5% of the remaining loan balance. This fee supports the VA loan program, though veterans receiving VA compensation for service-connected disabilities or certain surviving spouses are often exempt. The assumptor will need to gather various documents to demonstrate financial capability, including:
Credit reports
Income verification (pay stubs and tax returns)
Employment history
Bank statements to verify assets

The Assumption Process

Initiating a VA loan assumption begins by contacting the current loan servicer or lender to obtain their application package. This initial contact is important as the servicer holds the existing loan and guides the process. The lender provides the necessary forms and information for the assumptor to apply.

Next, submit the completed assumption application package, including all financial and personal documentation. This submission requires detailed information about the assumptor’s financial situation, such as credit reports, income verification, and employment history. The lender uses this information to determine eligibility, similar to a new mortgage application.

Upon submission, the lender undertakes a thorough review process, including credit checks, income verification, and potentially an appraisal. The lender has up to 45 days to process and decide on complete applications. Once the review is complete, the lender communicates its decision, approving or denying the assumption based on qualifications.

A crucial step for the original borrower is obtaining a “release of liability” from the VA and the lender. This document legally transfers full responsibility for the loan to the assumptor, protecting the original borrower from future financial obligations if the assumptor defaults. Without this release, the original borrower could remain secondarily liable for any losses incurred due to a default.

The final phase involves closing procedures, where new loan documents are signed and the property title is transferred. Any outstanding equity the seller has in the home (the difference between sale price and remaining loan balance) must be paid by the assumptor, often in cash or through secondary financing. The assumption is finalized once all paperwork is complete and approved, and the assumptor begins mortgage payments.

Impact of Assumption

A significant aspect of VA loan assumption for the original borrower is its effect on their VA loan entitlement. When a VA loan is assumed, the original borrower’s entitlement remains tied to that loan until it is fully paid off. This can limit the original borrower’s ability to use their full VA loan benefit for another home purchase, potentially affecting their capacity to obtain another VA loan with no down payment.

Entitlement restoration is possible under specific conditions. If another eligible veteran assumes the loan and substitutes their own VA loan entitlement, the original borrower’s full entitlement can be restored. This substitution requires VA approval and involves submitting VA Form 26-8106, “Substitution of Entitlement.” However, if the assumptor is not a veteran or does not substitute their entitlement, the original borrower’s entitlement remains encumbered until the assumed loan is repaid.

For the original borrower, obtaining a release of liability is important to ensure they are no longer financially responsible for the loan. Without this release, the original borrower’s credit could be negatively impacted if the assumptor fails to make timely payments or defaults. This protection removes the original borrower from future financial obligations related to the assumed mortgage.

For the assumptor, taking on an existing VA loan can present a financial advantage, especially in a rising interest rate environment. The assumptor inherits the original loan’s interest rate and remaining principal balance, which may be lower than current market rates. This can translate into savings on monthly payments and total interest paid over the loan’s life.

After the assumption is complete, the assumptor is fully responsible for all loan payments and obligations. This includes adhering to the original loan’s terms, such as the repayment schedule and other conditions in the mortgage agreement. The transfer of responsibility means the assumptor must manage the loan diligently to maintain good standing.