Veterans with VA mortgages can have their VA home loan assumed by someone else, also called a VA loan assumption. If your plans, goals, or needs changed and you need to get out of a VA loan one option is to sell your home but an alternative option is an assumable mortgage, a buyer takes over the loan.
A VA loan mortgage assumption is when a buyer takes over responsibility for a mortgage provided the buyer is approved for a loan. VA mortgage borrowers are allowed to have their VA home loan assumed or taken over by someone else. In this case, “loan assumption” means signing over the debt and the property to another person and making them legally responsible for the loan and for releasing the Department of Veterans Affairs from any liability associated with the mortgage.
VA Loan Assumptions: What VA Loan Rules Authorize
Under “certain circumstances” VA loan rules allow a property purchased with a VA mortgage to be sold/transferred even if the loan is not paid off in full, including VA loan assumptions.
According to the VA Lender’s Handbook, VA Pamphlet 26-7, “Borrowers who sell their properties under these conditions remain liable to VA for any loss that may occur as a result of a future default and subsequent claim payment, 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, currently serving military members, and surviving spouses who qualify for the benefit. However, VA loan assumptions require only that the assuming borrower (veteran or not) is financially qualified for the mortgage.
VA Home Loan Assumptions: Lender Participation Required
For most VA loan assumptions today, the participation and approval of the lender is required. For loans that closed prior to March 1, 1988, no lender approval is required because these VA loans were created under guidelines which made the “freely assumable”.
If your VA home loan has a case number issued (or other commitments made) after March 1, 1988, you will be required to work with your lender to make the VA loan assumption happen.
Veteran sellers have to ask for and obtain a mortgage liability release from the lender or servicer. Without a release of liability, the veteran seller could incur negative credit reporting (delinquency, loan default etc.) if the buyer fails to make payments of defaults on the loan.
Situations That Do Not Require VA Approval For A Loan Transfer/Assumption
Some circumstances do not require the participation of either “the holder or the VA” according to VA Pamphlet 26-7. These include, but may not be limited to, the following as described on the VA official site:
- The creation of a lien or other encumbrance subordinate to the lender’s security instrument that does not relate to a transfer of rights of occupancy in the property.
- The creation of a purchase money security interest for household appliances.
- A transfer by devise, descent, or operation of law on the death of a joint tenant or tenant by the entirety.
- The granting of a leasehold interest of 3 years or less not containing an option to purchase.
- A transfer to a relative resulting from the death of a borrower.
- A transfer when the spouse or child of the borrower becomes a joint owner of the property with the borrower.
- A transfer into an inter-vivos trust in which the borrower is and remains a beneficiary and which does not relate to a transfer of rights of occupancy in the property.
- A transfer resulting from a decree to dissolve a marriage, legal separation agreement, or from an incidental property settlement agreement by which the spouse of the borrower becomes the sole owner of the property.
State law, lender requirements, and other factors may affect any/all of the above. You will need to speak to your loan officer to determine what is applicable in your situation.
VA Loan Assumptions And Missed/Delinquent Payments
Borrowers who wish to have their VA home loan assumed should be aware for the requirement found in VA Pamphlet 26-7, section 5-23, which instructs the lender that the loan must either be current or brought current at the closing time when a VA loan assumption is permitted.
The assuming borrower must be deemed creditworthy by the lender, and the new owner of the property agrees “to assume all of the loan obligations, including the obligation to indemnify VA if a claim is paid”.
Fees Associated With VA Loan Assumptions
The VA Lender’s Handbook states that the lender may charge a reasonable fee for VA loan assumptions. A processing fee may be charged in advance, and the cost of credit reports and other fees are also permitted.
The dollar amount listed in the VA loan rules includes “$300 plus the actual cost of a credit report” for lenders with automatic approval authority. For lenders who must submit VA loan transactions for manual approval, the dollar amount is listed as $250 “plus the actual cost of a credit report” or the maximum amount allowed by state law.
There may also be a VA loan funding fee applicable for VA loan assumptions. “At loan transfer, the transferee is required to pay a funding fee to the servicer equal to one-half of one percent of the loan balance as of the date of transfer.”
There may be (depending on circumstances, lender requirements, and state law) additional fees to contend with for a VA loan assumption; ask your loan officer what may apply in your case.
Who Is Exempt From The VA Loan Assumption Funding Fee?
Certain people assuming VA home loans are, in general, exempt from paying the one-half-of-one-percent funding fee mentioned above.
- Veterans receiving VA compensation for a service-connected disability.
- Veterans entitled to receive VA compensation for a service-connected disability.
- A veteran rated eligible to receive compensation following a pre-discharge disability exam/rating.
- Surviving spouses of veterans who died in service or from a service-connected disability.
VA Loan Assumptions And Divorce
A veteran and spouse who divorce may have options under VA loan assumption policy. In “certain instances” according to VA Loan rules, the veteran can petition for release from the VA loan and allow the spouse to assume the mortgage.
This is permitted in cases where “the ex-spouse was jointly liable on the loan with the veteran prior to the divorce”. In other circumstances, VA loan rules permit the veteran to be “awarded the property and the ex-spouse may seek a release of liability.”
Is Another VA Loan Possible If I Have Had A VA Loan Assumed From Me?
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 a loan is transferred to another qualified VA loan beneficiary, their entitlement takes over provided a Substitution of Entitlement (SOE) is obtained. The Substitution of Entitlement, also referred as Statement of Veteran Assuming GI Loan, is a form ( VAForm 26-8106) that the qualified veteran buyer signs permitting substitution of entitlement for that of the veteran-seller. Without this certification the entitlement utilized to purchase the home will remain tied up there until the loan is fully repaid.
A Substitution of Entitlement is normally possible after the borrower who had the original VA loan assumed can present a Release Of Liability form from the original VA loan.
It’s very important to point out that when having a VA loan assumed, if you even think you may need to use your VA loan benefits in the future, at the time of transfer of ownership the original borrower should also submit a request to the VA to have VA loan entitlement restored for a new VA mortgage. Ask your lender how this procedure works if you aren’t sure.
Joe Wallace is a 13-year veteran of the United States Air Force and a former reporter for Air Force Television News