VA Assumable Loans Overview

What is a VA Assumable Loan?

VA assumable loans allow a buyer to take over a Veteran’s existing VA mortgage with its current interest rate and remaining balance, subject to approval by the loan holder or the VA. This feature is particularly advantageous in a higher interest rate environment, as it enables the buyer to benefit from the potentially lower rates that the original borrower secured.

Benefits for Sellers and Buyers

• Sellers: Can make the property more attractive to buyers, especially during periods of rising interest rates. If the buyer is also a Veteran and qualifies for entitlement substitution, the seller can have their entitlement restored, making it possible to use VA loan benefits again for future purchases.
• Buyers: Can avoid higher current market rates and often enjoy lower closing costs compared to originating a new mortgage.

Eligibility and Requirements

• Loan Status: The loan must be current.
• Creditworthiness: The buyer (assumer) must meet the VA’s credit and underwriting standards.
• Approval: The assumption needs to be approved by the loan holder or the VA, ensuring that the buyer is contractually and financially capable of assuming the loan responsibilities.

Process for Assumption

Application Submission: The buyer and seller submit an assumption application through the seller’s servicer.

Processing by Servicers: Depending on whether the servicer has automatic authority or not, the application will be processed within specified timeframes.

• • Servicer with automatic authority: Decision within 45 days of a complete package.
  • Servicer without automatic authority: Must forward the package to VA for approval within 35 days.

Closing the Assumption: Upon approval, the assumption is finalized with applicable fees and the transfer of obligations.

Fees and Costs

• Assumption Fee: The servicer’s processing fee is up to $300 ($250 without automatic authority), plus an allowed regional locality variance, the credit report, and other VA-listed fees.
• VA Funding Fee: 0.5% of the loan balance, paid by the assumer unless exempt.
• Other Possible Charges: Credit report, recording fees, taxes, insurance, and potentially title-related fees.

Very Important: Release of Liability and Substitution of Entitlement

• Release of Liability: Crucial for the seller as it removes their responsibility for the loan once it’s assumed. This protects the seller from potential future liabilities if the new borrower defaults.
• Substitution of Entitlement: Allows the buyer who is a Veteran to use their entitlement to assume the loan, freeing up the seller’s original entitlement. This is particularly important for the seller’s ability to use VA benefits in future home purchases. However if the buyer is not a Veteran and doesn’t have VA entitlement then the seller would not be able to restore his previously used entitlement therefore restricting the seller from future use of his full VA entitlement.

Special Considerations

• Substitution of Entitlement: Available if the buyer is a Veteran, allowing the seller to regain their entitlement.
• Unrestricted Transfers: Certain transfers, like those resulting from divorce, may not require formal assumption processes.

Appeals and Disputes

Buyers or sellers can appeal the decision if an assumption application is disapproved. The VA provides a structured appeal process through their VA ServiceNow Portal.

Why Consider a VA Assumable Loan?

VA assumable loans can provide significant financial benefits and flexibility in the real estate market. They can offer an easier and potentially less expensive transition of home ownership under favorable loan terms inherited from the previous owner.

The assumption is handled by the current loan servicer; Shirley can provide the second lien that bridges the equity gap.