VA Loan Assumption: What Are The Advantages and How Does It Work?

The most frequently asked questions regarding VA loan assumption can be answered right here. Many VA borrowers simply want to know how the loan assumption process works. Many are concerned with restoration of their entitlements after VA mortgages are assumed. And, others just want to know if their names will be removed from the federally-backed loans after their mortgages are assumed by other borrowers. These are all valid questions that have very straightforward answers.

One of the features that makes the VA Home Loan Guaranty Program so attractive to eligible borrowers is something called VA home loan "assumability." Yes, with the veterans mortgage program, certain home loans are assumable by other borrowers. The number one reason for anyone to assume another person’s mortgage, VA or not, is to obtain lower interest rate than what’s being offered in the current lending market.

But, with veterans loans, there is another good reason to assume a veteran’s mortgage. The VA funding fee for purchase loans is anywhere from 2.1 to 3.3 percent depending on the borrower and the situation. With VA loan assumption, the funding fee is just .5 percent.

In many places of the country, especially near military bases, there are clusters of homes that are owned by military members. These military communities are often prime places where VA home loan assumptions take place.

Knowing how veteran loan assumption works is the key. The VA guidelines are very clear that in order for a loan to be assumed, it must be taken over by another VA borrower. The sale of a home from one VA borrower to another VA-eligible borrower is the perfect scenario for veterans home loan assumption to occur. What happens in a VA loan assumption, essentially, is that the buyer takes liability of the mortgage from the seller.

The three key elements that must be present in order for a lender or the VA to grant release of liability (ROL) to the seller on a VA home loan are these:

1. The payments on the loan are up-to-date or will be brought up-to-date at closing

2. The buyer is VA-eligible and is a good credit risk with the ability to pay the loan

3. The buyer agrees to assume the veteran's liability to the federal government.

If the veterans loan being assumed was made on or after March 1, 1988, or a VA direct loan was closed after January 14, 1989, it is required by law for the seller to obtain an ROL from the lender before the loan assumption can take place.These are considered qualified assumption VA loans. If the ROL is not obtained on these loans, the lender could force by seller to exercise the "Due on Sale" clause in the loan instruments. The buyer could even be required to pay the loan in full or face immediate foreclosure, even if the payments on the loan are current at the time the loan is assumed.

Freely-assumable veterans home loans are those that were approved and issued before March 1, 1988. ROL is not required by law, but the seller should obtain one anyway to protect themself. ROL statements for freely-assumable VA loans are obtained directly from VA, not the lender. In the request for ROL, the seller must make an addendum to the real estate sales contract that the buyer agrees to assume the seller’s obligation to indemnify VA for any losses. Also, the sales contract should be contingent upon the VA’s approval of an ROL. For added seller protection, the Veterans Administration recommends that he or she apply for a ROL to the lender as well.

Once, a VA loan has been approved for ROL, there are two possibilities in which the mortgage assumption can take place. First, the seller who holds the original veterans home loan can allow his or her entitlement to be used by the buyer. Second, the VA-eligible buyer can replace the seller’s VA entitlement with his or her own entitlement.

In the first example, the entitlement originally used to acquire the loan that is being assumed stays with the loan. In this instance, the seller cannot restore his or her entitlement to use on another VA mortgage. Not until the buyer pays the loan off in full will the seller be able to use this entitlement on another VA loan.

In the second example, the buyer is substituting his or her own entitlement for the seller’s entitlement in order to assume the loan. In this instance, the seller can restore his or her entitlement immediately and use it to obtain another veterans home mortgage if he or she wishes.

If a veteran buys another veteran’s home, assumes the VA mortgage by substituting his or her entitlement for that of the veteran seller’s, then the following must be met:

1. The veteran buyer must occupy the property and complete VA Form 26-8106

2. The veteran buyer must have enough entitlement to put in place of the seller’s

3. Both buyer and seller must prove eligibility

This will give the seller the ROL necessary to proceed with the processing of VA loan assumption and the veteran seller’s entitlement used for that loan is restored and can be used again.

Of course, appropriate VA forms would need to be completed for entitlement to be restored. VA Form 26-1880, request for Certificate of Entitlement, can also be used to restore VA home loan entitlement.

Whether entitlement is restored or not during veterans home loan assumption, the seller’s name is always removed from the loan after closing. The buyer then assumes responsibility for making payments on the loan. And, the seller’s credit is no longer associated with that loan.

At the closing of any VA loan assumption, the buyer will be required to sign documents that make him or her legally obligated to the seller's loan liabilities.

For all the details on VA loan assumption, contact an experienced VA mortgage professional.