How to Assume a VA Mortgage: The Process

A VA loan assumption allows a new borrower to take over the existing terms of a VA mortgage from the original borrower. This process can be favorable for both buyers and sellers. Buyers may benefit from retaining the original, potentially lower, interest rate and generally incur fewer closing costs compared to originating a new loan. For sellers, an assumable VA loan can expand the pool of potential buyers, making their property more attractive.

Eligibility and Financial Requirements for Assumptors

To be approved for a VA loan assumption, the new borrower, known as the assumptor, must meet specific eligibility and financial requirements. The Department of Veterans Affairs (VA) and the loan servicer will assess the assumptor’s financial capacity, similar to the underwriting process for a new mortgage. This evaluation includes creditworthiness, income stability, and the intent to occupy the property.

The assumptor must demonstrate acceptable creditworthiness, which involves a satisfactory credit score, generally around 620 or higher. Lenders will also scrutinize the assumptor’s payment history and debt-to-income (DTI) ratio, often aiming for less than 41%. Demonstrating sufficient residual income is also a consideration.

Income stability requires proof of steady employment and sufficient income to cover the mortgage payments and other financial obligations. This necessitates providing recent pay stubs, W-2 forms, or, for self-employed individuals, tax returns. The assumptor must intend to occupy the property as their primary residence.

A non-veteran can assume a VA loan, provided they meet the lender’s financial and credit requirements. However, if a non-veteran assumes the loan without a substitution of entitlement, the original veteran’s VA loan entitlement remains tied to that specific loan until it is fully repaid. This means the original veteran may not have their full entitlement available for a future VA loan purchase.

A VA funding fee is required for assumptions. This fee is 0.5% of the loan balance. Certain assumptors, such as veterans receiving VA disability compensation, may be exempt from paying this fee.

Gathering Required Documents and Information

Before applying for a VA loan assumption, the assumptor needs to gather personal and financial documents. This ensures all necessary information is available for review by the loan servicer.

Personal identification documents are required, such as a valid driver’s license and a Social Security number. Financial documentation is essential to demonstrate the assumptor’s ability to take on the mortgage. This includes recent pay stubs, W-2 forms from the past two years, and, if self-employed, tax returns for the most recent two years. Bank statements from the last two to three months are also necessary to confirm available assets and funds for any required down payment or closing costs.

Information regarding existing debts, such as credit card statements and other loan statements, will be needed. Details about the property being assumed, including the existing VA loan number, the property address, and the original loan terms, are also important.

The loan servicer will provide application forms that the assumptor must complete using the gathered information. These forms will request personal details, employment history, and financial assets and liabilities. The assumptor will also need to provide authorization for the lender to pull their credit report.

The VA Loan Assumption Process

Once all necessary documents and information have been gathered, the VA loan assumption process can begin. It involves direct interaction with the current loan servicer and adherence to VA and lender guidelines.

The process starts by contacting the current VA loan servicer to obtain the application package. The application package, including all forms and documentation, must then be submitted to the servicer.

Following submission, the servicer initiates an underwriting review, where the assumptor’s credit, income, and assets are evaluated against VA and lender guidelines. This stage determines if the assumptor meets the financial criteria to take on the loan. The servicer may request additional information or clarification during this review period.

A property appraisal may be required to confirm that the home’s value supports the loan amount. This can occur if there are significant changes to the loan terms or if concerns about the property’s condition arise. Once the underwriting review is complete and all conditions are met, the assumption moves toward approval.

The final steps involve signing assumption documents, paying any required fees, such as the VA funding fee and other closing costs, and transferring the property title. The VA mandated that servicers must process VA loan assumptions within a 45-day timeline.

Protecting the Original Borrower’s VA Entitlement

For the original veteran borrower, protecting their VA loan entitlement is important in a VA mortgage assumption. This involves understanding how the assumption impacts their future eligibility for VA loan benefits.

A Release of Liability is a document that absolves the original veteran from financial responsibility for the assumed loan. Obtaining this release is important for the seller’s financial protection. The VA will grant this release if the assuming buyer is creditworthy and the assumption receives VA approval.

If a non-veteran assumes the loan, or if another veteran assumes it but does not substitute their own entitlement, the original veteran’s entitlement remains tied to that specific loan until it is fully paid off. This means the portion of their VA entitlement used for the original loan remains encumbered, potentially limiting their ability to use their full entitlement for a new VA loan until the assumed loan is satisfied.

A way to restore entitlement is through a Substitution of Entitlement, which occurs when another eligible veteran assumes the loan and substitutes their own VA entitlement for the original borrower’s. This action frees up the original veteran’s entitlement, making it available for use on a future VA loan.

Original borrowers should pursue a release of liability by applying through the loan servicer or the VA. This step ensures they are no longer financially accountable for the assumed mortgage and that their entitlement is managed or restored for future use. Without a release of liability or a substitution of entitlement, the original borrower remains secondarily liable for the loan.