If you are diving into the world of homeownership, particularly as a veteran or military
member, VA Loans are an essential topic to understand. The VA Loan offers an array of benefits for our veterans and their families to include easier underwriting, lower interest rates, no mortgage insurance, and a higher closing ratio than any other loan type. Of course, VA Loans are also assumable. The concept of "assuming" a VA Loan might sound complicated, but with the right information, it becomes a clear path. Let's dive in and gain a better understanding.
Understanding VA Loans
A VA Loan, backed by the U.S. Department of Veterans Affairs, offers unique benefits to qualified veterans, active-duty service members, and certain military spouses. One of its most notable advantages is often requiring zero down payment. This feature alone has helped countless veterans achieve the dream of home ownership since the loan program began in 1944. Today the VA Loan is responsible for creating the most diverse group of home owners, showing a reflection of our nation’s service members.
The Mechanics of Assuming a VA Loan
When you assume a loan, you're essentially taking on the mortgage of the current homeowner. If the property you're interested in is financed with a VA Loan, you can continue the mortgage payments under the same terms the original borrower had. The servicer will need to vet your ability to repay the mortgage before they agree to let the loan be assumed.
Advantages of Assuming a VA Loan:
Favorable Interest Rates: The original borrower might have secured their VA Loan when interest rates were particularly advantageous. By assuming the loan, you can benefit from these rates without needing to renegotiate. The advantages show directly in home ownership affordability. When assuming a loan at a lower interest rate, you can naturally qualify easier with lower debt to income ratios.
Cost Efficiency: Assuming an existing loan may circumvent certain initiation fees and related costs of establishing a new mortgage. Servicers may have costs associated with assuming loans, but the cost is significantly lower than completely reprocessing a new mortgage.
Steps to Navigate a VA Loan Assumption
Locate an Eligible Property: Seek properties where the existing owner has an assumable VA Loan. Any VA loan can be assumed, the trick will be finding a homeowner that is ready to sell their home and let a buyer assume their VA Loan.
Lender Verification: The institution that provided the original VA Loan will conduct a thorough review of your financial credentials, including creditworthiness and income. Each institution will have different standards or requirements to allow a VA Loan assumption to occur. If the buyer does not meet the institution’s requirements, they can deny the loan assumption.
Secure VA's Consent: Apart from the lender’s evaluation, the Department of Veterans Affairs must also sanction the loan assumption, ensuring all prerequisites are met.
Negotiate the Financials: When assuming a loan, you inherit the mortgage's remaining balance. If the property's valuation has increased since its purchase, it's crucial to agree with the seller on addressing this price discrepancy. Often the buyers will need to bring a down payment to satisfy the difference between the home’s market price and the assumable loan amount.
Finalize the Transaction: Upon approvals and final negotiations, you and the seller will formalize the assumption through legal contracts with the servicer, making you the new responsible party for the VA Loan.
Points of Consideration:
Not every VA Loan on the market is available for assumption; eligibility often hinges on the loan's origination date.
Assumption might involve certain fees. However, they are generally more economical than initiating a new mortgage.
Securing the approval of both the lending institution and the VA is paramount. Without these approvals, potential complications can arise for both the buyer and the seller.
Veterans may prefer to let another veteran assume their VA loan. This could ensure their VA entitlement would become free for a future purchase if they desire.
Proper credit history, income verification and assets are still required when assuming a VA Loan.
VA Loan assumptions do not require the property to be used as a primary residence, unless another veteran is replacing the entitlement with their own.
Conclusion
Assuming a VA Loan can be an advantageous endeavor for those aligned with its stipulations and benefits. By being informed and proactive, potential homeowners can harness this option to secure favorable loan terms. The journey to homeownership is multifaceted, and understanding the intricacies of VA Loan assumptions is an asset in this expedition.
