Can You Assume a VA Loan and How Does It Work?

A VA loan assumption allows a buyer to take over an existing VA-backed mortgage from a seller, inheriting the original interest rate and terms. This process can be attractive in periods of rising interest rates, as it enables the buyer to secure a lower mortgage payment. The new owner agrees to fulfill the existing payment obligations.

Eligibility for Assuming a VA Loan

A prospective buyer seeking to assume a VA loan must meet specific financial and occupancy requirements. The loan servicer, acting on behalf of the Department of Veterans Affairs (VA), evaluates the buyer’s creditworthiness, income, and debt-to-income (DTI) ratio. While the VA does not set a minimum credit score, lenders typically prefer a score of at least 620. A satisfactory credit history is also a significant factor.

The buyer’s income must be stable and sufficient to cover mortgage payments and other household expenses. Lenders assess this through the debt-to-income (DTI) ratio, which compares total monthly debt payments to gross monthly income. Lenders typically look for a DTI ratio no higher than 41%, though exceptions can be made for borrowers with strong compensating factors. Financial documents such as pay stubs, W-2 forms, and bank statements are required to verify income and assets.

The property being assumed must typically serve as the buyer’s primary residence, aligning with the occupancy requirements of original VA loans. The buyer does not need to be a veteran or have VA loan eligibility themselves to assume a VA loan; civilian buyers are eligible provided they meet the lender’s credit and income standards. The approval process ultimately rests with the loan servicer and the VA.

The Assumption Process

Once a buyer meets the eligibility criteria, the formal process of assuming a VA loan begins with submitting an application to the current loan servicer. This application typically includes various forms, such as a credit application and an assumption agreement. The buyer will also provide the financial documentation previously gathered, including proof of income, assets, and employment history, for the servicer’s review.

The loan servicer then undertakes an underwriting process, scrutinizing the buyer’s financial profile to ensure they can comfortably manage the loan obligations. This review by the servicer and subsequent approval by the VA can take a variable amount of time, often ranging from 45 to 90 days. A crucial component of this process for the original borrower is obtaining a “Release of Liability” from the servicer. This document officially absolves the original borrower from financial responsibility for the loan once the assumption is complete.

Upon approval, the final steps involve signing the assumption agreement and completing the property transfer at closing. The buyer will typically incur certain costs, including a VA funding fee, which is usually 0.5% of the loan balance, unless they are exempt. There may also be a processing fee charged by the servicer, which can range from $250 to $300. Other closing costs, such as title examination fees, title insurance, and recording fees, are also typically paid by the buyer.

Impact on the Original VA Loan Entitlement

The original borrower’s VA loan entitlement is significantly affected by the assumption of their VA loan by another party. If the assuming buyer is also an eligible veteran and agrees to substitute their own entitlement for the amount used by the original borrower, the original borrower’s full VA loan entitlement can be restored. This “substitution of entitlement” allows the original veteran to use their full VA loan benefit again for a future home purchase. This process requires the new veteran to have sufficient entitlement to cover the assumed loan amount.

In situations where the assuming buyer is not an eligible veteran, or does not substitute their entitlement, the original borrower’s entitlement remains “tied up” with the assumed loan. This means the original veteran may not have their full entitlement restored, limiting their ability to obtain another VA loan. The entitlement will only be fully restored once the assumed loan is paid in full or refinanced out of the VA program by the new owner.

It is important to distinguish between the release of liability and the restoration of entitlement. While the original borrower can obtain a release of liability from the loan servicer, which removes their financial responsibility for the assumed loan, this does not automatically restore their VA loan entitlement. The release of liability is a financial protection, while entitlement restoration is a separate benefit contingent on whether the new borrower substitutes their own entitlement.