Post from MilitaryByOwner
Those at all interested in real estate continue to watch the slow creep of loan interest rates. For now, the rates are staying competitive, but loan experts expect interest rates to increase in upcoming months. Assuming a VA Loan might become an attractive option in the near future for both military home buyers and sellers.
Before diving into the pros and cons of assuming VA loan, here’s a quick reminder of what a VA loan assumption is and who is eligible.
- Assuming a VA loan equates to taking over the mortgage of a homeowner without going through the long and expensive process of applying for a new mortgage. There is paperwork, but it’s specifically designed for a VA loan assumption.
- VA loan assumption isn’t restricted to active duty members and veterans. Anyone who the lender deems qualified to take on the payment amount is eligible to take over the loan.
Depending if you are the home buyer or home seller, there are reasons both for and against assuming a VA loan. Buyers need to thoughtfully consider all loan options, because assuming a VA loan may not work in your favor. Consulting a loan specialist with VA loan assumption experience is highly recommended.
Pros
- If the VA loan is assumable, it negates the need to apply for a new loan. The buyer can avoid paying closing costs and appraisal fees, likely saving thousands of dollars.
- A first time VA loan user pays an average of a 2.15% VA funding fee, a second-time VA loan user pays even more, but the VA only charges a 0.5% funding fee on the loan amount for the assumption, which is far less than the other fees.
- If the original VA loan was approved at a very low interest rate, there’s a good chance a new loan will have a higher interest rate. For example, if the loan was established with a fixed rate of 3.31% in 2011, and in 2018 the best VA loan interest rate comes in at 4.30%, it’s easy to see the savings add up for the buyer.
- VA sellers have an advantage when the above situation occurs, because the buying pool increases to include those who would consider assuming a VA loan. Sellers often market the beneficial interest rate as a selling feature within the house’s advertising.
- VA loans assumed by veteran buyers hold less of a risk for the seller because their full VA loan benefits are returned.
Cons
- The buyer must certify that the loan assumption is for a primary residence only if they want to swap VA housing entitlements with the seller.
- If a civilian buyer assumes the VA loan, the remaining portion of the seller’s VA entitlement in use stays with the original loan. The veteran cannot retrieve the remaining eligibility until the loan is paid off. This makes a short sale or foreclosure by the civilian owner something to consider, because the veteran owner loses that portion of their benefit.
- Lenders are not required to issue a VA Loan assumption.
- Some lenders do not have automatic authority to assume VA loans. They must send all requests to be reviewed by a VA loan office, and everyone involved with the home sale is subject to waiting for the VA to respond.
- Veteran buyers who want to assume a loan could be on the hook for an exceptionally large down payment. If the current veteran owner sells their home for more money than they owe on the loan, the VA loan assumers would have to come up with the difference for a down payment. Take a look:
- Sale Price $400,000
- VA Mortgage Balance $325,000
- Down Payment Needed $75,000
Remember, avoiding a hefty down payment is often one of the major reasons veterans use their housing benefit.
For more information about down payments and equity associated with a VA loan assumption, read over 4 Common Questions About VA Home Loan Assumption.
After the process of assumption is completed, it’s important that the original VA seller obtain their Release of Liability form. This document ensures the seller is not liable for the original loan in the future and the original terms of the loan pass to the buyer.
VA loan assumption is just one of many options home buyers have available today. The home buying hunt should always start with plenty of research on topics like location and affordability, finances, and home ownership responsibilities. MilitaryByOwner is the leading provider of military life related real estate resources.
Don't Forget About Current Interest Rates
One of the most compelling reasons to not assume an existing VA loan is that, for many, the current interest rate environment is far more attractive than the terms on an existing loan. Before assuming a loan, you should compare its terms with current rates.
Connect with a VA Mortgage Expert to get personalized rates. They'll help you compare loan options you might qualify for and offer support through the entire loan process, from applying to closing.
