Can You Assume Someone’s VA Loan?

A VA loan provides a significant benefit for eligible service members, veterans, and their spouses, facilitating homeownership with favorable terms. A unique aspect is their assumability, allowing a qualified buyer to take over an existing VA loan. This process allows the new buyer to inherit the original loan’s interest rate and remaining balance, which can be particularly advantageous when current market interest rates are higher than the existing loan’s rate. This mechanism differs from a traditional home sale where the buyer obtains a new mortgage, and the seller uses those funds to pay off their existing loan. Instead, a VA loan assumption allows the buyer to step directly into the seller’s shoes regarding the mortgage terms. This offers an opportunity for buyers to secure a lower monthly payment and for sellers to make their property more attractive. However, specific conditions and requirements must be met for an assumption to occur.

Assumptor Eligibility Requirements

To assume a VA loan, an individual must meet specific financial and occupancy criteria. The buyer must satisfy the lender’s creditworthiness standards, including an acceptable credit score and debt-to-income (DTI) ratio. Lenders look for a minimum credit score, often around 620, and a DTI ratio less than 41%. This ensures the prospective assumptor has a stable financial history and sufficient capacity to manage the mortgage payments.

Beyond credit and income, the assumptor must demonstrate income stability and have adequate residual income to cover monthly expenses after housing and existing debts. The property must also meet occupancy requirements, meaning the buyer intends to occupy it as their primary residence. The VA requires occupancy within 60 days of closing; exceptions can extend this period, but usually not beyond 12 months.

A key advantage of VA loan assumptions is that the buyer does not need to be a veteran, opening the opportunity to a wider pool of prospective homeowners. However, if the assumptor is not a veteran, it carries implications for the original veteran’s entitlement, which will be discussed further. The property must be in good condition; a lender may request an appraisal to ensure it meets VA standards. The loan terms, including the interest rate and principal balance, remain unchanged for the assumptor.

Original Borrower’s Entitlement and Liability

When a VA loan is assumed, the original borrower faces implications regarding their VA entitlement and ongoing liability. VA loan entitlement is the amount the Department of Veterans Affairs guarantees on a veteran’s home loan, which helps determine how much they can borrow without a down payment. If a VA loan is assumed, the entitlement used for that loan remains tied to the property until the loan is fully repaid. This can limit the original veteran’s ability to obtain another VA loan with full benefits for a future home purchase.

To prevent this restriction, the original borrower can seek a “release of liability” from the VA, which formally removes their financial responsibility for the assumed loan. A condition for this release is that the assumptor must be approved by the VA or the loan servicer and meet their creditworthiness standards. If the assumptor is an eligible veteran with sufficient VA loan entitlement, they can formally substitute their entitlement for the original borrower’s, a process known as “substitution of entitlement.” This action fully restores the original veteran’s entitlement, allowing them to use their VA loan benefit again without limitations.

If a release of liability is not granted or a substitution of entitlement does not occur, the original borrower remains contingently liable for the loan. This means that if the assumptor defaults on payments, the VA can seek repayment from the original veteran, potentially impacting their credit. Securing a formal release of liability is important for sellers to protect their financial standing and future VA loan eligibility.

Steps for Loan Assumption

Assuming a VA loan involves several steps, beginning with initial contact and culminating in closing. Once a potential assumptor identifies a property with an assumable VA loan and meets eligibility criteria, they should contact the current loan servicer. The servicer, not a new lender, is responsible for processing the assumption. This initiates the formal application process.

The assumptor must submit an application package to the loan servicer, including documentation verifying financial standing. This involves providing financial statements, employment verification, and authorizing credit checks. The servicer will conduct a review, assessing the assumptor’s creditworthiness, income sufficiency, and debt-to-income ratio, similar to a new loan application. The property must also be in good standing, with the seller’s loan current on payments.

Upon approval, which VA guidance mandates should occur within 45 days of receiving a complete application, both the buyer and seller will proceed to closing. During closing, the assumptor will sign paperwork agreeing to take on the remaining balance and terms of the existing loan. Fees associated with a VA loan assumption are lower than those for a new mortgage.

These include a VA funding fee of 0.5% of the loan balance, which may be waived for certain exempt veterans, and a processing fee that can range from $250 to $300, plus a locality variance based on geographic region, potentially adding $386 to $463. Other costs may include credit report fees, recording fees, and title-related expenses. The original borrower should ensure a formal release of liability is processed as part of closing to protect their future VA entitlement.