VA Loan Assumption
What if I were to tell you that there’s a way to buy a home at an incredibly low interest rate in 2023 and beyond? Well, if you are a VA-eligible homebuyer, you’re in the right place! This process can save you thousands, or even tens of thousands, each year in interest payments alone.
VA Loan
In this post, we’re going to talk about a really neat aspect of the VA loan that many people don’t know about. I do need to preface this with that I am not a loan officer so everything I say is coming from public information as well as my own experience. You need to consult with a particular loan servicer to get advice on your specific situation.
VA Loan
So I’m in Charleston and the military’s presence is huge here. As many of you guys know, I’m a former Naval officer and have used multiple VA loans in my personal life, so I know a thing or two about the process. But there’s not a lot of great information out there on how an assumable loan actually works. And to be honest, many individual lenders know as much as you do, and here’s why. They aren’t part of the process. If you’re shopping for a house and you tell your lender you want to assume a VA loan, the lender makes no money. I know it’s a cynical way to look at it, but it’s true. By assuming a loan, you cut the lender out of the picture, so it’s up to your realtor and attorney to fill that void. I think that’s why there’s a gap in information out there. Hopefully this post fills in some of these gaps.
VA Loan
First, let me get an issue addressed right off the bat. Can a non-VA eligible buyer assume a VA loan from the seller? The answer is actually yes, per the VA’s website itself. The catch is that this will affect the seller’s ability to purchase future homes because he is not able to restore his VA entitlement. So I would never recommend that a seller allow for an assumption unless the buyer is a VA-eligible buyer who can substitute their own eligibility.
I’m going to break this blog into three parts: First I’m going to start with an overview of the VA loan assumption process and how it works, then I’m going to talk about the advantages and disadvantages the assumption has for a buyer, and then finally I’ll discuss the advantages and disadvantages the assumption has for the seller. Make sure you read all the way to the end because you really need to know what each player is doing, not just you.
So the VA loan is one of those rare loans that allow for assumption. This means that a buyer for the property can take over the existing loan and yes- that means they get to keep the interest rate – as long as they’re eligible for the loan and intend to occupy it as a primary residence. I just helped a buyer close on a home in 2023 where the note had a 2.375% interest rate. For perspective, that is 4% lower than the current market rate at the time and translated into almost $10,000 of interest saved per year. And that’s not a gimmick. This is one of the best kept secrets out there.
There is one catch though. The buyer will need to come up with the difference between sales price and loan balance in either cash or some other cash-like loan, such as a home equity loan from an already owned property. Based on my internet research plus talking with multiple lenders, I did not find any example of someone taking a second position mortgage on top of the first position mortgage for the assumption. In other words, it’s unlikely you’ll be able to finance the difference in sales price and loan balance through conventional financing. But it doesn’t hurt to check with a couple loan officers you trust – maybe they have a product that could help you out.
So let’s take for instance this fictitious home that is being sold for 400 thousand dollars. Say the existing loan balance for the seller is 300 thousand dollars. This means that in order for the assumption to work, the buyer will need to come up with a 100 thousand dollar down payment to make up the difference. Many people don’t have this sort of money lying around. So in my opinion the best targets for VA loan assumptions are probably homes that were bought in the past year or two that don’t have a lot of equity. These homes were not owned long enough to let market appreciation or principal paydown really create a lot of equity for the owner.
So let’s talk about strategy and the process. In order to assume a VA loan, as a buyer you first need to identify a property that has an existing VA loan AND the seller is willing to allow for an assumption. Be sure to talk to your Realtor about this – don’t try to do it alone. After that, with the help of your realtor it’s negotiations as usual EXCEPT you’ll specify that the contract is contingent upon the VA loan assumption.
Here’s where things get interesting though. After you have a ratified contract, the seller will need to call whichever bank is servicing the loan and allow the buyer access to their account per the bank’s policy. After that, it primarily falls on the buyer to complete the rest of the process. You don’t have a loan officer who is pushing you to a closing date and the bank’s assumption department might be small or undermanned, so it’s incumbent on the buyer to be driving the process. The bank is going to require a whole bunch of paperwork from the buyer plus a ton of documentation. This is because the buyer needs to go into underwriting with that bank and become qualified to assume the loan. In other words, the buyer still needs to meet income and credit requirements and be able to assume all mortgage obligations.
After the buyer comes out of underwriting, the bank will contact the VA and transfer eligibility to the buyer. This is all happening behind the scenes. Once the VA has given the thumbs up, and the bank has given the thumbs up, we can then close on the house.
So it’s a very convoluted and non-traditional process. You’re dealing with a large bank that will make almost no money from this transaction, so to be completely honest you’re probably not going to get great customer service. At the end of the day – it hardly matters. Each side is going to win in this transaction.
Now let’s chat about the advantages and disadvantages the assumption has for the buyer. So the biggest advantage is obviously the interest rate. Using a simple mortgage calculator, the difference between a 3% interest rate and a 6% interest rate amortized on a 30 year schedule translates roughly into an additional 500 dollars per month, which is $6000 per year. With the high interest rates we’re seeing in today’s market, this could easily make an otherwise unaffordable home much more affordable. Also, consider that the buyer is going to have very little closing costs compared to a traditional loan, since there’s no lender fees. The buyer will still need to pay for miscellaneous fees such as an home inspection, appraisal, wood destroying organism inspection, attorney fees, and 0.5% of the loan amount as part of the funding fee. The funding fee might be waived in part or in full if you have VA disability – you’ll just need to chat about that with the processor handling your file.
Even though the advantages are great, the disadvantages make it so it’s not the right fit for everyone. For one, the buyer will need to come up with a large down payment. As a buyer, you need to cover the difference between sales price and loan balance. VA loans are great because they typically don’t require a down payment as long as you’re under your certificate of eligibility limit, but in this case you’ll have to put down a good chunk of change. Okay – so this next one is also a disadvantage for the seller but I’ll cover it here too. The assumption process isn’t quick. These take much longer than a typical escrow period, usually between 60 and 120 days. So if you’re looking for a quick close then this isn’t for you. But if the closing date isn’t as important to you, or if you can negotiate a pre occupancy agreement to move into the property before it closes, or if you get this process started months in advance, then this might not be as big of an issue.
You might be wondering why on earth would the seller consider allowing the buyer to assume the loan if it’s going to take so long? And that’s a fair question. But the assumption does have one distinct advantage for the seller. That is, you’re saving the buyer a whole bunch in closing costs plus thousands, if not tens of thousands of dollars, on an annual basis in interest savings. Part of these savings should be translated to the seller. As the seller, you should be able to demand TOP dollars for your house. I’m not saying that the buyer should be paying discount points to the seller, but pretty close to it! The realtor who is representing the seller should stick to this reason first and foremost in any negotiation with prospective buyers. The seller has the leverage here – not the buyer – even if it’s a buyers market.
The biggest problem to the seller is that the process is long. And while it’s also a disadvantage to the buyer, it’s really the seller who is bearing all of the risk and all of the cost. For instance, the seller still needs to make their mortgage payments while this process is ongoing. Depending on how long it takes, that’s 2 or 3 extra payments. And also, what happens if the buyer pulls out of the contract or doesn’t qualify for the loan? Depending on where the process was at, that could be a couple months of lost time for the seller and now they have to start back at square one. Also, consider the implications for a follow on purchase for the seller. The release of liability and subsequent restoration of the seller’s certificate of eligibility doesn’t happen until after closing, and it could be a couple of weeks or even months. So if the seller is looking to buy another property with a VA loan immediately after closing, this could be impacted.
So that’s a VA loan assumption! It’s great for both the buyer and the seller if you can make it work, but keep in mind that it’s not a good fit for everyone.