Under What Conditions Is a VA Loan Assumable?
Understand the specific conditions and detailed process for successfully assuming a VA home loan, from eligibility requirements to entitlement impacts.
A VA loan assumption allows a homebuyer to take over an existing VA loan from a seller, inheriting the original terms, including the interest rate and remaining balance. This option can be appealing in periods of rising interest rates, offering a lower mortgage payment than a new loan. Loan assumptions often involve fewer closing costs for the buyer. While VA loans are generally assumable, specific conditions must be met for both the prospective buyer and the loan.
Assumptor Eligibility Requirements
To assume a VA loan, the prospective buyer, known as the assumptor, must meet specific financial qualifications set by the Department of Veterans Affairs (VA) and the loan’s servicer or lender. Lenders typically assess the assumptor’s creditworthiness, looking for an acceptable credit score and a manageable debt-to-income (DTI) ratio. While the VA does not set a minimum credit score, many lenders require a score of 620 or higher, along with a DTI ratio generally below 41%.
Income verification requires the assumptor to demonstrate sufficient and stable income to cover the mortgage payments and other existing debts. Lenders verify income through documentation such as recent pay stubs, tax returns, and employment history. The assumptor must also intend to occupy the property as their primary residence, typically within 60 days after closing.
The assumptor does not need to be a veteran or VA-eligible. Non-veterans can assume a VA loan if they meet the financial and occupancy requirements. However, if a non-veteran assumes the loan, the original veteran borrower’s VA loan entitlement remains tied to that loan until it is fully paid off. This can limit the original veteran’s ability to use their VA loan benefit for a future home purchase.
Loan Eligibility Requirements
Beyond the assumptor’s qualifications, the existing VA loan itself must meet certain conditions to be eligible for assumption. The loan must be current at the time of the assumption, meaning it cannot be delinquent or in default. If the loan is not current, it must be brought up to date, typically through a cash payment at or before closing, rather than through a loan modification at the time of assumption.
The original lender, or their designated servicer, must approve the assumption, even though VA loans are generally assumable. For VA loans originated after March 1, 1988, VA approval is also required, and the lender will review the assumptor’s qualifications to ensure they meet underwriting standards. While a full new appraisal is not always mandated for an assumption, the property generally needs to meet the VA’s minimum property requirements (MPRs).
The terms of the original loan, including the interest rate and repayment schedule, are generally retained, which is a primary draw for buyers. A VA funding fee is typically required for loan assumptions, even if the assumptor is a veteran, set at 0.5% of the remaining loan balance. This fee helps offset the program’s costs to taxpayers and is usually paid by the buyer, though it can be negotiated between parties. Exemptions from this funding fee apply to veterans receiving VA compensation for service-connected disabilities or those eligible for such compensation.
The Assumption Process
Once both the assumptor and the loan meet the eligibility criteria, the assumption process involves several procedural steps. The assumptor initiates the process by applying with the current loan servicer or lender, providing comprehensive financial documentation. This typically includes authorization for a credit report, verification of income through pay stubs and tax returns, and details of employment history. The lender evaluates this information against their underwriting standards, similar to a new mortgage application, to determine the assumptor’s ability to repay the loan.
After the lender’s review, the VA must also approve the assumption for loans originated after March 1, 1988. This dual approval process ensures that both the financial institution and the government agency are satisfied with the new borrower’s qualifications. Loan servicers with automatic authority are expected to process and decide on assumption applications within 45 calendar days of receiving a complete application package. If the application is denied, the assumptor or seller has the right to appeal the decision to the VA within 30 calendar days.
A critical element for the original veteran borrower is obtaining a Release of Liability from the VA. This official document frees the original borrower from future responsibility for the loan. The VA typically grants a release of liability if the assumptor is deemed creditworthy and, for loans originated after March 1, 1988, if an eligible veteran assumes the loan and substitutes their own VA entitlement. Without this release, the original veteran remains liable for the mortgage if the new borrower defaults, which can have significant financial and credit implications.
The final steps involve closing the assumption, where new loan documents are signed, officially transferring responsibility to the assumptor. This process may also include adjustments to escrow accounts for property taxes and insurance. The buyer typically needs to bring funds to cover the difference between the property’s sale price and the remaining loan balance, as well as the VA funding fee and any other applicable closing costs.