A VA assumable loan refers to a mortgage loan that is backed by the Department of Veterans Affairs (VA). It can be assumed by another eligible borrower. When a VA loan is assumable, it means that a new buyer can take over the existing loan and assume responsibility for its terms and conditions.
In a typical home sale, the buyer secures their own financing by applying for a new mortgage with whatever bank they choose. However, with an assumable VA loan, the buyer has the option to assume the existing loan of the seller. This assumes they meet certain eligibility criteria set by the VA. This process is done with the bank that is servicing the current loan.
Assuming a VA loan can be advantageous for the buyer because they may be able to take advantage of the existing loan’s favorable terms, such as a low interest rate or a lower down payment requirement. In essence, the new borrower picks up the remaining balance from the original borrower. This can potentially save the buyer money compared to obtaining a new loan.
To assume a VA loan, the buyer must qualify for VA loan eligibility requirements. This can include being a qualified veteran, active-duty service member, or an eligible surviving spouse. This allows the current VA loan holder to restore their entitlement. Otherwise, if the person wanting to assume does not qualify for a VA loan, they can still assume the loan; however, the VA member’s entitlement is now tied up in the property until that mortgage is paid in full (via a refinance, sale of the home, or balance payoff). The assumption process involves obtaining the lender’s approval, completing necessary paperwork, and meeting any additional requirements set by the VA and the lender.
It’s important to note that not all VA loans are assumable. The specific terms and conditions of assumability can vary, depending on when the loan was originated and any subsequent changes in VA regulations. Therefore, it’s crucial for both the buyer and seller to consult with the lender and review the loan documents to determine if assumption is a viable option. However most loans originated after March 1, 1988 are eligible. Currently, VA assumptions are taking between 45-60 days up to 6 months to complete the process from beginning to end.
So why doesn’t everyone do them? Well, what most fail to realize is that in order to maximize on this – there is generally an equity gap. If the current owner has a lot of equity, the new owner will have to bring in a large down payment to cover the gap. For example, let’s say the owners loan payoff is $100k. They originally paid $150k for the home. Now the home is worth $225k on the open market. The new borrower would have to bring in $125k (difference between market value and what is owed or $225k-$100k in our example) + closing costs in certain areas. This can be difficult if new borrower has limited funds.
Overall, the timing of how long the process can take is a negative in most sellers eyes who want or need to get out of the property quickly. If a new buyer can bring in the necessary funds though, this can be a great option.
If you have questions about the VA assumable loan or other topics, leave us a comment!
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