VA Loan Assumption

VA borrowers have options when moving to a new home for a permanent change of station (PCS) or any other reason. Veterans with VA mortgages can sell their home, rent it out or have a qualified borrower take over the loan. 

Through the VA mortgage loan assumption program, a qualified buyer can take over responsibility for a VA borrower’s mortgage. The VA borrower signs over the debt and the property, making the buyer legally responsible for the loan.

What Is a VA Loan Assumption? 

VA loan assumptions allow buyers to sell or transfer properties purchased with a VA mortgage, even if the loan is not paid off in full.

The buyer who assumes the mortgage becomes responsible for the loan’s remaining balance, its interest rate and the monthly mortgage payments.

However, borrowers who allow another buyer to assume their mortgage “remain liable to the VA for any loss that may occur as a result of a future default and subsequent claim payment,” according to VA Pamphlet 26-7, “Unless the property is sold to a creditworthy purchaser who agrees to assume the payment obligation.”

Who is Allowed to Assume a VA Loan?

VA loans are approved for veterans, current military members and surviving spouses who qualify. VA loan assumptions, however, require only that the new borrower – veteran or not – is financially qualified for the mortgage.

So, to assume a VA loan the new borrower must:

• Meet VA credit and income requirements
• Be able to assume all mortgage obligations
• Pay the VA funding fee, which is 0.5% of the loan balance

How VA Home Loan Assumptions Work

Lenders must approve and participate in VA loan assumptions for loans that closed after March 1, 1988. Loans closed before 1988 fell under previous VA loan guidelines that made them “freely assumable.”

Sellers must ask for and obtain a mortgage liability release from their lender or servicer to participate in a VA loan assumption. Without a release of liability, the sellers’ credit could be harmed if buyers fail to make payments or default on the loan.

Situations That Don’t Require VA Approval For a Loan Transfer/Assumption

Neither “the holder nor the VA” has to participate in some loan assumption circumstances, according to VA Pamphlet 26-7, the VA’s lender handbook. Such circumstances include:

• Creation of a lien or other encumbrance that does not relate to a transfer of occupancy rights on the property.
• Creation of a purchase money security interest for household appliances.
• Transfer upon the death of a joint tenant or tenant.
• Granting of a lease of three years or less not containing an option to buy.
• Transfer to a relative resulting from the death of a borrower.
• Transfer when the spouse or child of the borrower becomes a joint owner of the property with the borrower.
• Transfer into a trust in which the borrower is and remains a beneficiary and that does not relate to a transfer of occupancy rights.
• Transfer resulting from a decree to dissolve a marriage, legal separation agreement or from a property settlement by which the spouse of the borrower becomes the sole owner of the property.

Keep in mind, state law, lender requirements and other factors may affect the above circumstances. Speak to your loan officer to determine what rules apply to your situation.

Pros and Cons of VA Loan Assumption

Assuming a VA loan can benefit both buyers and sellers in some situations. Here’s a list of the pros and cons.

Pros of VA Loan Assumption

• No military service is required to assume a VA loan, however, sellers can regain full VA loan entitlement if another veteran assumes the loan.
• At 0.5%, the funding fee on a VA loan assumption is less than a typical VA loan.
• Buyers can save on closing costs. 
• Interest rates remain the same, which is particularly beneficial if the original borrower locked in at a low rate.

Cons of VA Loan Assumption

• If a civilian assumes the loan, the original borrower won’t get their VA loan entitlement back.
• Lenders are not required to approve loan assumptions, and some may have policies against participating in loan assumptions.
• When lenders approve the transaction, the new buyer must meet their credit and income requirements.
• If VA approval is necessary, the process can be long and tedious.

VA Loan Assumption Fees

Buyers who assume a VA loan must pay a VA funding fee equal to 0.5% of the loan balance on the date of transfer. Lenders may also charge a reasonable fee for VA loan assumptions, including the cost of credit reports and a processing fee, which they may charge in advance.

According to VA’s loan rules, these fees max out at “$300 plus the actual cost of a credit report” for lenders with automatic VA loan approval authority. 

Lenders who manually submit VA loan transactions can charge fees of $250, “plus the actual cost of a credit report,” or the maximum amount allowed by state law, according to the VA’s lender handbook. 

State laws may require additional fees. Ask your lender what fees apply in your state. 

Who Is Exempt From the VA Loan Assumption Funding Fee?

Certain people are exempt from paying the fee:

• Veterans who receive (or are entitled to receive) VA compensation for a service-connected disability.
• Veterans who are eligible to receive compensation following a pre-discharge disability exam or rating.
• Surviving spouses of veterans who died in service or from a service-connected disability.

VA Loan Assumptions and Divorce

VA loan assumption policy provides options for veterans and spouses who divorce. Veterans can petition for release from the loan and allow the spouse to assume the mortgage when “the ex-spouse was jointly liable on the loan with the veteran prior to the divorce,” according to the VA. 

VA loan rules also permit ex-spouses to seek a release of liability, awarding the property to the veteran.

Can I Get Another VA Loan If My Prior VA Loan Was Assumed?

VA loan rules permit an otherwise eligible VA borrower to apply for a new VA mortgage loan in the wake of a prior VA loan assumption under certain conditions.

If another qualified VA loan beneficiary takes over the loan, that buyer would substitute their own VA loan entitlement for the previous owner’s. In turn, the VA restores the previous owner’s loan entitlement. 

To do this, the original borrower must first present a liability release from the original VA loan. Then, the buyer must fill out and submit a substitution of entitlement (SOE), VA Form 26-8106. Without this certification, the original borrower’s entitlement remains tied to the house until the new buyer repays the loan. 

Then, the original borrower must send the VA a request for a restoration of VA loan entitlement. Learn more about VA loan entitlement restoration here.

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