Do You Have to Be a Vet to Assume a VA Loan?
Explore the conditions and implications of transferring a VA home loan. Understand what this means for both the buyer and the original borrower.
VA loans, guaranteed by the U.S. Department of Veterans Affairs, offer eligible service members, veterans, and surviving spouses a pathway to homeownership. These loans carry distinct advantages, such as competitive interest rates and no requirement for a down payment in many cases. An appealing feature of these loans is their assumability, meaning another party can take over the existing mortgage. This process can offer significant benefits for both buyers and sellers, particularly in markets with fluctuating interest rates.
Requirements for Assuming a VA Loan
Assuming a VA loan involves meeting specific eligibility criteria. Both veterans and non-veterans can assume a VA loan, provided they meet the financial requirements.
The prospective assumptor must demonstrate financial capability to take on the mortgage obligations. This includes a satisfactory credit history, often requiring a minimum credit score around 620. Lenders also assess income and debt-to-income (DTI) ratio, often preferring a DTI below 41%. Assumptors must also have adequate residual income.
A primary requirement for the assumptor is the intent to occupy the property as their primary residence. The VA expects occupancy within 60 days of closing, though exceptions can extend this period. The existing VA loan must be in good standing, with the original borrower current on all payments. Loan servicers may impose additional requirements beyond VA guidelines.
Original Borrower’s Role in Assumption
The original borrower plays a significant role in the VA loan assumption process, particularly concerning their ongoing liability and VA loan entitlement. Obtaining a “release of liability” from the loan servicer and the VA is a key step for the seller. Without this formal release, the original borrower remains financially responsible for the loan, potentially facing negative credit impacts if the new borrower defaults.
The assumption also impacts the original borrower’s VA home loan entitlement. If a veteran with their own VA loan entitlement assumes the loan, they can substitute their entitlement for the original borrower’s, restoring the original borrower’s full entitlement for future use. If a non-veteran assumes the loan, or if a veteran does not substitute their entitlement, the original borrower’s entitlement remains tied to the assumed loan, limiting their ability to obtain another VA loan until it is repaid.
Navigating the Assumption Process
The assumption process begins with the prospective assumptor contacting the loan servicer. The servicer provides an application package detailing required documents and steps. Working directly with the servicer is important, as they process the assumption.
The application submission process requires the assumptor to provide comprehensive financial documentation. This includes a credit report, income and employment verification, and details about assets and liabilities. The servicer then conducts an underwriting review, similar to a new loan, to assess the assumptor’s financial qualifications.
Upon approval, the closing process involves signing assumption agreements and other paperwork to transfer the loan. While VA loan assumptions can offer a faster closing timeline than new loan originations, typically 30 to 45 days, the overall process can still take several months.
Financial Aspects of VA Loan Assumption
A financial advantage of a VA loan assumption is the transfer of the existing interest rate to the new borrower. This can lead to savings, especially when current market interest rates are higher than the original loan’s rate, such as assuming a 3% loan when new loans are 7%.
The assumptor is responsible for paying a VA Funding Fee, which is 0.5% of the loan balance. Exemptions from this fee apply to certain individuals, such as veterans receiving compensation for service-connected disabilities. Other costs may include a lender processing fee, often capped at $300. Additional expenses can include credit report fees, title transfer costs, and recording fees.
A financial consideration is the equity payment. The assumptor pays the original borrower the difference between the home’s purchase price and the outstanding loan balance. This amount represents the seller’s equity and is often paid upfront, which can be a significant sum. While assumption results in lower overall closing costs compared to a new mortgage, these financial obligations must be considered.