Is a VA Loan Assumption Right for Me?

Assumptions are a key feature of VA-guaranteed loans. Today, there are many homes with attractive VA loan interest rates, but is an assumption right for you?

This seems like a great opportunity for both sellers and buyers. Sellers could get more $$ for their home with this valuable financing in place. Buyers could assume a loan below market rates, save hundreds or more each month, and be years into an amortization schedule that pays more towards principal each month than a new loan.

This “pitch” is certainly enticing and continues to get a lot of search engine traffic and social media attention. ?I’m keeping an eye out for that right opportunity myself (and the inspiration for the cover photo). ?But let’s take a closer look to see if this is right for you. ?If you’ve had positive or negative experiences with assumptions I’d love to hear your story.

The quick answer is that most sellers or buyers abandon this after digging into the details, but if you can line everything up it could be a fantastic opportunity. I can’t process your assumption package, but I’m happy to share what I know. I definitely would like to talk if you are thinking of giving up some or all of your VA loan entitlement during this process.

Let’s look at a couple process items and timeline, before we dive into things to consider for yourself or your client.? I pulled as much language as I could from the VA circulars as I see lots of assumption posts that have inaccurate info.

?Process and Timeline

1.?????? ?To start, the seller and buyer will submit an application for an assumption. This application indicates the assumer’s (buyer’s) interest to assume full liability for the loan. The assumption is reviewed and processed by the current loan holder or their authorized servicing agent. This differs from a traditional purchase or refinance transaction because the buyer isn’t selecting the lender.

2.?????? ?Once the current loan holder or their authorized servicing agent receives the complete application, they will underwrite the assumption similar to underwriting a VA loan purchase transaction (except no appraisal is required). This will likely require borrower documentation such as W2s, paystubs, bank statements, ID’s, tax returns (as required), verification of employment, employment history, housing history, other real estate owned, Certificate of Eligibility (COE) (as required) and a review of credit and debts. The servicer must also ensure the loan is current or will be made current at or before the close of the assumption. It is permissible for the loan to be brought current through cash at close. It is not permissible to bring the loan current through a loan modification.

3.?????? ?If the assumption request includes a substitution of entitlement, the Certificate of Eligibility for the assumer should be reviewed to ensure the buyer has enough entitlement to substitute the seller’s entitlement. I’d make sure this is completed as early as possible in the process. You don’t want 45+ days to go by and be surprised by an entitlement issue.

4.?????? The holder or servicer must complete its examination and notify the seller and buyer of its decision to approve or disapprove the assumption within 45 calendar days of receipt of a complete underwriting package. If the assumption application is disapproved, the notification must advise the assumer and seller that the decision may be appealed to VA within 30 calendar days. The notice must also include the reason(s) for disapproval. If the decision is appealed, and the VA approves the assumption, the holder or its authorized servicing agent, should close the assumption within 30 calendar days of VA’s decision. There have been enough instances of non-compliance that the VA issued updated guidance including the penalties for non-compliance by the existing loan holders. Noncompliance in Processing Assumptions: https://www.benefits.va.gov/HOMELOANS/documents/circulars/26-23-27.pdf

5.?????? An assumption may be processed with or without a substitution of entitlement. This means that a buyer/ assumer doesn’t need to be a veteran with entitlement to assume the loan. As the seller, please don’t accept this without fully understanding the impact of your future VA loan eligibility. Realtors advising your clients, please make sure they look at this as well.

6.?????? Unless the assumer is eligible for a fee waiver, a funding fee of 0.5% of the loan balance must be paid on an assumption. This must be collected at closing and may not be financed into the loan balance (unlike a purchase or refinance).

7.????? The original Veteran’s entitlement remains encumbered by the loan until the loan is paid in full or a restoration is received. If the assumer is an eligible Veteran who intends to occupy the property as their home and has sufficient entitlement, they may agree to substitute their entitlement for the seller’s entitlement. In this case, the seller would receive a restoration of entitlement.

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Things to consider as a Seller:

·?????? What is your goal by allowing an assumption? Getting a higher sales price? Helping out another veteran?

·?????? Does your buyer have sufficient entitlement for a substitution. This is needed to restore your encumbered entitlement on this property. It’s not enough to verify that they are a veteran, or even that they have a Certificate of Eligibility. You should verify they have sufficient entitlement if this is important to you. Please consider carefully if you’re ok having someone use your EARNED benefit for the remainder of the term of the loan if a buyer isn’t fully substituting your entitlement.

·?????? Will your buyer qualify for the VA Loan? This can get tricky. In a typical sale, well-informed ?buyers select a lender and get pre-approved before they start shopping. In this case, your current lender/ servicer will have to approve the borrower. They have 45 days to make a decision after a completed application. If they are already approved by a VA lender you trust, that’s a positive indicator, but you won’t know until they are approved with your current lender.

·?????? How does the timeline compare to a traditional sale and are you comfortable with this timeline? This could take up to 45 days to get approved + time to close the loan if no appeal is needed. If an appeal is needed, you’d have to appeal within 30 days and the VA needs to review the request. If the VA approves the assumption, the lender has up to 30 days to close the loan. If you have 45 to 120 days to close, an assumption could work for you.

·?????? Does your buyer have the cash to cover the equity gap (the difference between the current loan balance and your asking price)? Have you seen proof of funds?

·?????? Do you need your VA loan entitlement restored quickly for another purchase? On a traditional sale we can get your entitlement restored the same day to facilitate another VA loan purchase. With the assumption process their can be a delay in this restoration.

·?????? Has a release of liability been prepared to ensure you’re not liable for the mortgage once assumed?

·?????? Can your buyer qualify and close with a purchase loan, if the assumption falls through?

·?????? Is an experienced third party involved to help guide the borrower through the process?

·?????? Are you current on your loan?

Things to consider as a Buyer:

·?????? This can only be used if the home will be your primary residence.

·?????? Do you have the cash to cover the equity gap (the difference between the current loan balance and your asking price). Have you considered the opportunity cost of this money? For loans with really attractive rates, we’re typically seeing a lot of home price appreciation. I’d do some kind of blended calculation to compare the rate you’d be getting + opportunity cost of the money against a market rate mortgage with a smaller or no down payment. Do you have the proof of funds if asked?

·?????? Do you have the cash to pay the .5% funding fee (unless exempt)? Unlike purchases, you can’t roll this into the loan.

·?????? Are you already pre-approved for a VA loan by someone you trust? This doesn’t guarantee approval from the seller’s lender, but it’s a positive indicator.

·?????? Do you have sufficient entitlement to replace the seller’s entitlement if that’s important to the seller?

·?????? Do you have the time needed for this type of transaction that could take longer than a traditional sale?

·?????? A VA appraisal is not required. Do you want to pay for your own appraisal?

·?????? Can you qualify and close with a purchase loan, if the assumption falls through?

·?????? Have you considered hiring an experienced third party to help guide you through the process.

·?????? Is the seller current on their loan?

The approved assumption fees are listed below:

As part of the UMortgage Veteran's Alliance team, I work to help educate borrowers, agents, sellers and buyers how to get the most from their VA loan benefits and successfully navigate transactions using this powerful financing option.

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