If you look at the headlines, the message is clear. Interest rates are going up, and this is impacting the affordability of home mortgages – especially those with the monthly payment associated with a 0% down VA loan. If you’re in the market for a home near a military installation, odds are the previous buyer purchased the home with a VA loan. With rising rates, you may have additional options. While banks aren’t always the friendliest when it comes to assuming a VA loan, it is a possibility that you should look into.
What is assuming a VA loan and who can do it?
- Assuming a VA loan is essentially taking over the mortgage from the previous buyer. In this lending environment, it’s great if the previous owner has a mortgage with a 3% interest rate, given the recent increase in rates.
- VA loan assumptions are not restricted to active-duty members and veterans. Anyone who the lender/servicer deems qualified to take on the payment amount is eligible to take over the loan.
Assuming a VA loan is always an option, but it’s definitely worth consulting with your lender before doing so as it could be a nuanced process.
Pros
- Reduced Funding Fee for VA borrowers. The VA only charges a 0.5% funding fee on the loan amount for the assumption. Generally, first time VA loan users pay a 2.30% VA funding fee (depending on down payment amount), and a subsequent use of the VA loan changes the Funding Fee to 3.6%,
- No Need For A Brand-New Loan. VA assumable loans negate the need to apply for a new loan. The Buyer can avoid paying closing costs and appraisal fees, this can save a Buyer thousands of dollars.
- Huge Savings. 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 2.5% in 2020, and in 2022 the best VA loan interest rate comes in at 5.5%, this can save the Buyer thousands of dollars over time.
- VA Sellers Can Capitalize On The Market. VA Loan assumptions give VA sellers an advantage when the above situation occurs, because the number of Buyers increase to include those who would consider assuming a VA loan. Sellers can market the beneficial interest rate as a selling feature.
- Seller can use VA loan again. Once the property closes, the seller can now use their VA loan in an additional location if they are moving or looking to purchase another property.
Cons
- As with all VA loans, the buyer must intend to use the property as their primary residence.
- 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 obtain the remaining eligibility until the loan is paid off in full. A short sale or foreclosure by the civilian can cause the veteran owner to lose that portion of their benefit.
- Lenders are not required to issue a VA Loan assumption. Speaking with real estate professionals, this is often one of the bigger challenges associated with a VA loan assumption.
- Some lenders do not have automatic authority to assume VA loans. These requests are sent to the VA directly to be reviewed and approved. This can increase the time requirement to close on the transaction.
- Given the rise in home prices over the last few years, the purchaser may be on the hook for a large down payment depending on the sale price. For example, if you are purchasing a home for $200,000, and the remaining mortgage balance is $150,000, you as the buyer need to cover the difference between the two. While this may be beneficial given the rate, it’s worthwhile to consider the implications of a large down payment vs. the lower rate.
A VA loan assumption can be incredibly beneficial and worth looking into if you want to save money on interest over the course of your home loan. It is strongly recommended that you do your due diligence and consider all of your options when purchasing a home.$
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