For many military veterans and active service members, the VA Home Loan program is an attractive option for buying a home. VA loans offer many benefits, including competitive interest rates, no down payment requirements, and no private mortgage insurance (PMI). However, life circumstances can change, and sometimes transferring the VA loan to another borrower is necessary. That’s where the VA loan assumption comes in.
What is VA Loan Assumption?
VA loan assumption is when a third party takes over the outstanding balance on an existing VA loan. The new borrower assumes all the legal obligations and responsibilities associated with the loan, including making payments and complying with the loan terms.
There are two types of VA loan assumptions: simple and formal. A simple assumption is the most common type and requires minimal paperwork. In this scenario, the new borrower takes over the payments on the loan and assumes responsibility for the debt. The original borrower is still liable for any default, but the new borrower is responsible for making the payments.
A formal assumption is more complex and requires the lender’s approval. The lender will review the new borrower’s creditworthiness and financial history to ensure they can take on the loan. The lender may also require an appraisal of the property to ensure that it is worth the loan’s outstanding balance. Once approved, the new borrower assumes all of the legal obligations associated with the loan, and the original borrower is released from all responsibility.
How Does VA Loan Assumption Work?
The new borrower must meet specific eligibility requirements to assume a VA loan. They must demonstrate that they are creditworthy and can make the loan payments. The VA loan assumption process is only available to certain types of loans, including:
- Loans closed before March 1, 1988, which are freely assumable
- Loans closed after March 1, 1988, which are only assumable with the lender’s approval
- Loans that are in default or delinquent, which are subject to the lender’s approval
In addition to meeting these requirements, the new borrower must obtain a Certificate of Eligibility (COE) from the VA. The COE certifies that the borrower is eligible for a VA loan and specifies the amount of entitlement available.
Once the new borrower has obtained the COE and met the other eligibility requirements, they can begin the loan assumption process. The first step is to contact the lender and request an assumption package. The assumption package will include all necessary paperwork and instructions for completing the process.
The new borrower must provide financial information to the lender, including income, employment history, and credit score. The lender will review this information and determine whether the borrower can assume the loan.
If the lender approves the assumption, the new borrower will need to sign a new loan agreement and assume all of the legal obligations associated with the loan. This includes making all the payments on time and complying with the loan terms.
What are the Benefits of VA Loan Assumption?
VA loan assumption can be a good option for both the original and the new borrower. For the actual borrower, it provides an opportunity to transfer the loan to someone else without selling the property. This can be helpful if the original borrower needs to relocate or can no longer make the loan payments.
For the new borrower, VA loan assumption can be an attractive option because it allows them to take advantage of the benefits of a VA loan without going through the whole loan application process. They may also be able to assume the loan at a lower interest rate than they could obtain on their own.
In addition, the VA loan assumption can be a good option for buyers.