Loan assumptions have been rare for the last 10 years as interest rates have continuously decreased. But recent significant mortgage interest rates hikes have caused more sellers and buyers to explore the possibility of a loan assumption.
Conventional loans are rarely assumable and government backed loans like VA, FHA and USDA loans make up the majority of assumptions. VA loans are the most common loan for assumptions. For the sake of simplicity, all information in this post refers to a VA loan assumption.
Important note: While I try to be as detailed as possible with the information provided here, there can be variances with each situation. You may have seen information about VA loan assumptions elsewhere that conflicts with the information below. This could be due to a local difference, a timing issue, or a transaction condition. Every situation for a VA assumption is unique; therefore, it is important to reach out to your real estate agent to discuss your very personal situation.
What is a loan assumption?
A loan assumption is when a home buyer takes over the current homeowner’s existing loan. A buyer can do this without applying for a new mortgage. Instead, the seller’s loan is transferred to the buyer upon the sale of the home. The debt liability is transferred while the mortgage interest rate and repayment period remain unchanged for the new owner.
Related Reading: Steps to Buy a Home
Why is a loan assumption attractive to the seller?
A loan assumption can be a great solution for a home seller in an otherwise challenging market. In today’s real estate dynamics, it’s very likely that the interest rate on an assumed loan will be much lower than current rates. This can be a great selling point for a home.
An assumption also expands the pool of potential buyers. Buyers who might not qualify for a regular loan with today’s interest rates could be more likely to qualify for an assumption with a lower rate.
The seller might also be able to receive a higher sales price when a loan assumption is possible. Even if the buyer pays a higher sales price for the home, the savings from the lower interest rates and less expensive closing costs should offset this premium fairly quickly.
Related Reading: Steps to Sell a House
Who can assume a VA loan?
It may come as a surprise, but you don’t have to be a veteran to assume a VA loan. Sellers need to keep in mind that the liability for a VA loan can be released after an assumption by a nonveteran, but the VA entitlement cannot be released. If the buyer defaults on the loan, the seller permanently loses the amount of entitlement tied up in the home.
The buyer needs to financially qualify for the VA loan assumption. The qualification process and standards are very similar to applying for a regular VA Loan.
Investors are not eligible for any government loan assumptions. Only buyers planning to utilize the home as their primary residence are eligible.
Related Reading: Tips for Choosing a Lender
VA Loan Assumption Pros for the Buyer:
- Lower Interest Rate: The lower interest rate of the assumed loan means the buyer will have a much lower monthly mortgage payment.
- Less Expensive Closing Costs: The funding fee on a VA assumption is just 0.5% of the loan amount. This is a fraction of the usual 2.3% funding fee on regular VA loans. A side note: Veterans and spouses exempt from a funding fee for a regular VA loan are also exempt from the funding fee for a loan assumption.
- Seasoned Loan: Depending on the age of the loan, the buyer will take over a seasoned loan. This means a larger portion of the monthly payment will be going toward principal. In the first few years of any mortgage, only a small amount of your monthly payment will be applied to your principal. As the loan matures, this amount slowly increases. You can easily see that in amortization tables. If the loan you are assuming is fairly new, this difference might be only pennies but you’ll save money with the lower interest rate.
- Affordability: Today’s interest rates are pricing many buyers out of the market. But even if a buyer can’t qualify for a loan with the current interest rates, they might be able to qualify with the lower interest rate of an assumed VA loan.
Related Reading: Tips for Lowering Your Mortgage Payment
VA Loan Assumption Pros for the Seller:
- Higher Sales Price: The buyer might be willing to pay a higher sales price for the home because there are significant interest rate savings over the life of the loan.
- No Appraisal: A new VA appraisal is not required. The main financial hurdle to overcome is the additional down payment the buyer has to provide to cover the gap between purchase price and remainder of the loan.
- More Potential Buyers: The option of a VA assumption means the pool of potential buyers is expanded and the seller increases their chances of a sale in a challenging market.
- Avoid Short Sale: If the seller is in danger of going into a short sale (meaning they owe more than they may receive in net proceeds) or if foreclosure procedures have already been started, a VA Loan assumption might be worth discussing. The lender will need to approve the assumption and you’ll need enough time to complete the process. A loan assumption could prevent the seller from still owing money to the bank for the amount that they were deficient in the transaction. Or if the deficiency has been forgiven, they would owe taxes on income and it’s a much quicker process. It’s best to speak with us to see if this is a viable option for you.
Related Reading: Tips for Sellers Navigating the Shifting Market
Cons of a Loan Assumption for a Buyer:
- Lengthy Process: The buyer will need to bring patience because an assumption will take a minimum of 60 days.
- Large(r) Downpayment: The buyer will need to cover the gap between the purchase price and the remaining loan balance with their downpayment. Depending on how the contract is drafted, this down payment could increase by the principal payment with each month that passes until closing.
Related Reading: Why a Preapproval Makes You a Powerful Buyer
Cons of a Loan Assumption for a Seller:
- Liability: Your legal liability for the debt does not automatically dissolve as soon as the assumption is complete. Sellers have to request in writing a release of liability from their mortgage lender or servicer. Without this release, the liability remains connected to the seller and poses an incredible credit risk. If the new homeowner makes late payments or defaults, the seller takes a hit on their credit and is still responsible for the repayment of the loan.
- VA Entitlement: If your buyer is a veteran with sufficient entitlement, the seller should ask for substitution of the entitlement. This means that the VA buyer’s VA loan entitlement will be substituted and then the VA seller’s entitlement is released for another home. Failure to do this keeps the sellers entitlement tied up and unusable in the sold home. The entitlement can also be permanently lost if the new owner defaults on the assumed loan.
- Lengthy Process: VA assumptions take a minimum of 60 days and this could delay the seller’s ability to purchase another home.
What is a gap? How much is the down payment?
The gap is the difference between the sales price of the home and the remaining balance on the loan. This is usually referred to as the gap, but it can be thought of as the buyer’s downpayment. It is vital for the buyer to calculate the gap to ensure that there are enough funds for the downpayment. The buyer might have cash, pull it from equity in other properties (ie. HELOC – Home Equity Line of Credit), get a gift from friends or relatives or get an additional loan. Second lien loans are more expensive but as assumptions increase there is a good chance that lenders will offer more loan products that cover this gap.
Related Reading: Get Your Downpayment Ready
How much does an VA loan assumption cost?
- There is funding fee of 0.5% of the loan balance paid directly to the VA. It is not applicable if the Veteran is exempt from paying a funding fee for a regular VA loan.
- The servicer will most likely have a processing fee and possibly a transfer fee.
- If an intermediary is engaged to navigate and possibly speed up the transfer process, they will charge about $550. This fee is usually subject to change.
- There are additional small fees that the servicer might require including a credit report fee, flood certification fee, etc.
Related Reading: Closing Day
Why does a loan assumption take so long?
Assumptions happen so infrequently that lenders are really not set up for processing them efficiently. Lenders don’t really make money on a loan assumption, so they are not incentivized to have enough people and processes to speed things up. It’s possible that this process will get faster if loan assumptions become more common. But until then, buyers and sellers will have to expect a longer closing time.
There are third party companies that help navigate and speed up the process as much as possible by staying on top of the correspondence and paperwork. Not all lenders are the same. Some will cooperate and work quickly while others will drag their feet. Regardless, it will be extremely helpful to have the support of a third party that specializes in assumptions.
Related Reading: Tips for Choosing a Mortgage
How can you find a home for sale with a VA loan assumption?
We suggest looking at homes for sale that were purchased before March/April of 2022 when interest rates were still so low. Keep in mind that the further back you go, the larger your gap will be. That is unless the homeowner cash out refinanced the home before April 2022.
Contact us and we will set you up with a specific search for VA loan assumptions on the MLS here in the Pikes Peak region and in the Denver MLS, if desired. Or click here to request listing alerts and make a note that you’re looking for homes with assumable VA loans.
How do buyers find homes with a low gap?
If you are searching for a property with a potentially low gap, I recommend looking for properties purchased 12 to 24 months ago. Or homes that have been recently refinanced where the homeowners pulled equity out of the home. Again, contact us to set up a search specific to your needs.
Related Reading: Find Your Dream Home
Tips for a VA Loan Assumption:
- If possible, the buyer should run a mortgage loan process parallel to the assumption process just in case the assumption ends up being denied.
- The seller should be aware that they will have to start all over with selling the house if the assumption is not approved. Keep that in mind for your own moving timeline.
- The lower the gap, the more valuable the loan is.
- The lower the interest rate, the more valuable the loan is.
- Consider hiring a third party company that specializes in loan assumptions to help navigate the process.
Seller Checklist for VA Assumption
Provide this information to the listing agent because it will need to be disclosed to the buyer:
- Does the lender allow the loan assumption?
- What is the remaining principal of the loan?
- What is the interest rate?
- What is the monthly principal & interest (PI) payment
- What is the principal, interest, taxes & insurance (PITI) payment?
- Provide a copy of all loan documents with personal information redacted. It’s best to ask the listing agent which documents of the loan package will need to be provided to the buyer once under contract.
- How many total liens and mortgages are on the home?
Seller should review the following prior to engaging in a contract:
- Is the buyer qualified?
- Does the buyer have enough entitlement to substitute for the existing entitlement?
- Does the buyer have proof of funds for the gap/downpayment amount
Click here to download the Home Selling Guide
Buyer Checklist for VA Assumption
Buyer should review the following information prior to submitting an offer:
- Is the loan (or all loans) current?
- Is there confirmation that the seller’s loan is assumable?
- Who is the lender?
- What’s the interest rate?
- What’s the payment? (PI and PITI)
- Can the buyer afford the mortgage payment?
- What’s the gap amount? Does the buyer have enough funds for the down payment?
- Provide the seller with a qualification letter from the lender
- Provide proof of funds for the gap to the seller
Click here to download the Home Buying Guide
We can’t emphasize enough that this is a complicated, lengthy process and it’s vital to have an experienced real estate professional by your side. Give us a call for a consult: 719-219-9739 or email susanna@co-regroup.com.
