The Complete Guide to VA Loan Assumptions: The Good, The Bad, and The Reality

VA loan assumptions are a hot topic these days, and I often get the same questions about how they work, who can assume them, and whether they're worth it. So, let's dive into the details—the good, the bad, and the reality—so you can make an informed decision if you're considering this route for buying or selling a home.

What is a VA Loan Assumption?

A VA loan assumption allows a buyer to take over the seller's existing VA loan on a home. Essentially, instead of securing a new mortgage, the buyer assumes the seller's loan, keeping the original interest rate, terms, and remaining loan balance.

For example, if a homeowner has a $350,000 VA loan at a 2% interest rate, a buyer could assume that loan and continue making payments at that low rate instead of taking out a new mortgage at today’s higher rates as part of the purchase of the house.

Why Would Someone Do a VA Loan Assumption?

The biggest advantage of a VA loan assumption is securing a lower interest rate, especially if the original loan was taken out in 2020 or 2021 when rates were at historic lows (around 2-3%). In today’s higher-rate environment, this can result in significant savings.

Who Can Assume a VA Loan?

• VA-Eligible Buyers: If the buyer is eligible for a VA loan, the entitlement transfers, and the seller is fully released from liability.

• Non-VA Buyers: Yes, a non-VA buyer can assume a VA loan, but the original VA loan holder (seller) remains tied to the loan on their certificate of eligibility, which could impact their ability to use their VA benefits in the future.

The Challenges of VA Loan Assumptions

While assuming a VA loan sounds great in theory, there are some hurdles to be aware of:

1. Covering the Price Difference

Let’s say the home was originally purchased for $350,000, but after a few years, it's now worth $450,000. The buyer assumes the existing loan balance (e.g., $325,000), but what about the remaining $125,000?

Buyers have two options:

• Pay Cash: The buyer must bring in the difference between the loan balance and the purchase price in cash.

• Take Out a Second Loan: A second mortgage or home equity line of credit (HELOC) can help cover the gap. However, VA guidelines require that this second loan also be assumable, and these loans typically have higher interest rates than the assumed VA loan.

  
  

2. Lengthy Assumption Process

Unlike a standard home purchase, VA assumptions require approval from the mortgage servicer. This process is slow and inefficient, often taking 3-8 months due to paperwork delays and lack of proficiency by loan servicers.

3. Limited Seller Incentives

For sellers, a VA loan assumption isn't always attractive. If they can sell to a traditional buyer and close in 30 days, why wait months for an assumption to be processed? This makes assumptions less common unless the seller is highly motivated or has a personal connection with the buyer.

When Does a VA Loan Assumption Make Sense?

• Family Transfers: Parents or grandparents transferring property to children.

• Friends or Private Deals: When the seller is willing to wait and negotiate favorable terms.

• Buyers with Cash or Equity: Those selling another home and using their profits to cover the price difference.

Final Thoughts

VA loan assumptions can be an excellent tool for buyers looking to lock in low interest rates, but they come with challenges. The process is slow, sellers may not find it appealing, and buyers need to be prepared for large cash outlays or secondary financing. If you're considering a VA loan assumption, weigh the pros and cons carefully and be prepared for a lengthy process.

Have questions about VA loan assumptions? Feel free to reach out—I’d be happy to chat and help guide you through the process!