What Is a VA Assumable Loan and How Does It Work?
Understand how VA loan assumptions work, offering a unique path for buyers to take over existing mortgages and sellers to facilitate sales.
A VA assumable loan offers a unique pathway to homeownership by allowing a qualified buyer to take over an existing mortgage originally backed by the U.S. Department of Veterans Affairs (VA). This process means the new homeowner assumes the seller’s remaining loan balance, interest rate, and repayment terms.
Core Features of VA Assumable Loans
A primary characteristic of a VA assumable loan is the ability to retain the original loan’s interest rate and repayment terms. This can be particularly attractive when prevailing interest rates are higher, potentially leading to lower monthly payments. By assuming an existing loan, buyers can often avoid some of the typical costs associated with new loan origination, such as certain lender fees and some closing expenses.
While a new appraisal is not always strictly mandated by the VA for an assumption, the loan servicer may still require one to ensure the property’s value sufficiently supports the loan amount. Lender approval of the new borrower is always a requirement for a VA loan assumption, regardless of whether the buyer is a veteran. The VA also stipulates an occupancy requirement, meaning the individual assuming the loan must intend to occupy the property as their primary residence.
Who Can Assume a VA Loan
Eligibility for assuming a VA loan extends to both individuals who are VA-eligible (such as veterans, active-duty service members, and certain surviving spouses) and those who are not VA-eligible (civilians). If a VA-eligible individual assumes the loan, they have the option to substitute their own VA loan entitlement for the seller’s. This substitution can free up the seller’s entitlement, allowing them to use it for a future VA loan.
When a non-VA eligible individual assumes the loan, they can still do so, but they are typically required to make a direct payment to the seller. This payment covers the difference between the property’s agreed-upon sale price and the outstanding loan balance, as this amount is not financed through the assumed loan. For all assumptors, the loan servicer will conduct a thorough credit and income qualification process. This ensures the new borrower has the financial capacity to meet the loan obligations, typically looking for a credit score of at least 580 and a debt-to-income ratio of 45% or lower.
Navigating the Loan Assumption Process
In the preparatory phase, the buyer or seller should first contact the loan servicer to understand their specific requirements for an assumption. Buyers will need to gather comprehensive financial documentation, including recent pay stubs, W-2s, tax returns, and bank statements, which will be used for the lender’s qualification assessment. The loan servicer will also pull a credit report as part of this initial review.
If a VA-eligible buyer plans to substitute their entitlement, they will need to obtain a Certificate of Eligibility (COE) by submitting VA Form 26-1880. This form requires personal identification, military service details, and information about any prior VA loans. All required forms, such as the assumption application and any specific servicer documents, must be accurately completed before submission.
Once all preparatory documents are assembled, the complete application package is submitted to the loan servicer. The servicer then undertakes an underwriting review to assess the buyer’s financial qualifications. The VA has mandated that servicers process VA loan assumptions within a 45-day timeline, aiming to streamline what was previously a much longer process. Upon approval, the final steps involve signing the assumption agreement and transferring the property title.
Key Considerations for Sellers
For the original homeowner selling a property with a VA assumable loan, securing a “Release of Liability” from both the VA and the loan servicer is an important step. This document absolves the seller of personal responsibility for the assumed loan, protecting them from potential financial repercussions if the new borrower defaults. Without this release, the original borrower remains legally obligated for the mortgage, which could negatively impact their credit if the buyer misses payments.
The assumption also impacts the seller’s VA loan entitlement. If a VA-eligible buyer substitutes their own entitlement for the seller’s, the seller’s entitlement is fully restored, allowing them to use their full benefit for a future VA loan. However, if a non-VA eligible buyer assumes the loan, or if a VA-eligible buyer does not substitute their entitlement, the seller’s entitlement remains tied to the assumed loan until it is fully paid off. The buyer must also pay the seller directly for any difference between the sale price and the outstanding loan balance, as this equity is not financed through the assumption.