VA home loan assumption is easily one of the most overlooked benefits for veterans – primarily because many veterans aren’t aware that it exists, or don’t understand how the process works. However, with the right guidance, assuming a VA loan can be a time-saving and cost-effective method for veterans looking to buy or sell a home.
What is a VA home loan assumption?
In essence, a loan assumption is when the responsibility of an existing loan is transferred from one borrower to another. A VA loan assumption is when one veteran takes over the loan, interest rate, and mortgage payments of another veteran when taking ownership of the home. This benefit allows buyers to take advantage of much
lower interest rates, minimal closing fees, an expedited transaction process, and, ultimately, easier access to the housing market. Veterans who want to sell their homes can do so more easily while enjoying a full restoration of their VA loan benefits – providing the person assuming the loan has VA loan eligibility.
Why a VA home loan assumption is beneficial
Veterans have a range of benefits at their disposal when looking to secure financing for a home. Opting for a VA home loan by accessing your Hawaii VA loan entitlement could allow you to buy your dream home in Hawaii. Alternatively, you could apply to assume the home loan of another veteran. But why would you choose assume a home loan? Quite simply, to save money, time and effort! Let’s take a closer look at the benefits.
Locked interest rates
When you assume someone’s VA home loan, you take over the loan balance, monthly mortgage payments, and most importantly, their interest rate. In today’s rising interest rate market, it means you could take advantage of a locked interest rate, which may be lower than current rates. You can also keep the interest rate and cost low through a down payment. For example, if the sales price is $1.1 million, and the sellers have an interest rate of 2.25% on their VA home loan. The principal and interest payments are $4,336 at 2.25%, while a VA high balance loan now (27 July, 2022) is 4.25%, or payments of $5,542; $1,206 more in monthly interest charges! Assuming the VA loan, would save the buyer $1,206 * 360 months, or $434,160 in interest payments over the life of the loan!
Save time and money
As a seller, allowing another veteran to assume your VA home loan means that you can avoid the lengthy sales process and simplify the transfer. In most cases, there is no need for a new appraisal or additional credit check, and the assumption can be completed in a shorter period of time. This can be a great option for those who need to sell their home quickly or are looking for a simpler transaction. In the case of death, for example, this can allow the surviving spouse to take over full ownership of the home with minimal additional expense and hassle. Once the process is complete, and you have obtained a release of liability (explained later) from your lender or Hawaii VA home loan mortgage broker, you can apply to have your VA loan benefit restored, either partially or in full.
Eligible for full loan benefits
If you sell your home and transfer your VA loan to another veteran, you may be eligible to have your entire loan benefit restored. This is because the Department of Veterans Affairs views a loan assumption as a new loan, which means you would once again be able to access the full amount of your entitlement. If you only partially restored your loan benefit when you purchased your home, you may now be able to access the remaining amount.
Who is eligible for a VA loan assumption?
Eligible applicants who may apply for a VA loan assumption include veterans and active military members, reservists and the national guard, or a surviving spouse. Although rare, in some cases, civilians who meet the VA’s credit and mortgage payment requirements may qualify for VA home loan assumption. Note that these requirements may vary, so you’ll need to contact your Hawaii VA mortgage broker for more details if you are interested in this option.
How to qualify for a VA loan assumption
To qualify, you will need to:
• Be a veteran, active military member, reservist, national guard, or a surviving spouse willing with a remaining VA entitlement. Or,
o A non-veteran buyer and the veteran seller is willing to have their VA entitlement encumbered for the remainder of the loan
• Agree to take over all liabilities associated with the mortgage
• Submit evidence of on-time mortgage payments for the last 12 months
• Have enough residual income to cover the new monthly mortgage payment
• Be approved by bank currently servicing the VA loan
You’ll also need to meet the credit requirements of the lender. If you want to find out if you qualify, or how to initiate the process, it is best to speak to a VA mortgage broker who will guide you through the process and help you with the paperwork.
The benefits of a VA loan assumption in a nutshell
• Avoid paying closing costs and appraisal fees
• Pay the original interest rate at a fixed rate
• First-time VA home loan users pay on average 2.3% VA funding fees, while VA home loan assumption comes with just a 0.5% VA funding fee
• The seller’s benefits can be restored fully, allowing them to use their full VA Home loan entitlement, including the option to buy with no down payment
• Simplified transfer process that can be completed quickly
What to watch out for when assuming a VA loan
As the original homeowner, if your loan is being assumed, you need to make sure you or you obtain a release of liability document from your lender before closing, which your VA loan officer or mortgage broker can help with. This document confirms that you are no longer the owner of the property and that you are not responsible for the loan, mortgage, or interest.
You also need to ensure that the buyer substitutes their Hawaii VA loan benefit for yours so that you can restore your entitlement in full or in part, and protect your credit score. If the buyer is a civilian, this can prevent you from accessing your entitlement until the loan is fully paid off.
As the buyer, you can only assume a VA home loan if you intend to use the home as your primary residence. Investment properties or vacation homes don’t qualify.
You will also be responsible for any liens or judgments against the property that the seller doesn’t pay off before closing, so make sure to do your due diligence and research the property thoroughly before assuming a loan.
Another thing to remember in any state, but especially when utilizing your VA Home loan benefit to assume a high cost Hawaii VA home loan – If the sale price is more than the loan, the assumer/buyer will need to make up the difference. For instance, if the sales price for a Hawaii house is $1,100,000 , but the Hawaii VA home loan balance is $800,000 (due to property appreciation) , then you (the buyer) will need to come up with the $300,000 difference. Second mortgages are allowed, but you will typically be able to get a max of 90% loan-to-value for your financing, vice the typical 100% with VA loans. So, with our 1,100,000 example, providing the individual(s) assuming the loan are able to achieve 90% financing with a second mortgage, the buyers will still need to come up with the 10%, or $110,000 cash.
Why haven’t I heard of this before?
Very simple, a combination of ignorance and greed. The VA loan assumption is a tool to be used in an environment with rising interest rates, and for the better part of the last 30-40 years rates have been falling. Loan officers, even self-proclaimed VA home loan experts, have little-to-no experience in the assumption arena. In fairness, the knowledge has not been necessary, because the process is done with the mortgage bank servicing the loan. Secondly, mortgage loan officers do not make money off VA loan assumptions! They are not going to promote products which reduce/eliminate their business, regardless if it may be the best option for my fellow veterans.
Get in touch with Elias Halvorson to learn more about qualifying for a VA home loan assumption and how he can help you finance the purchase of your new home in Hawaii.
Elias Halvorson has over a decade of experience in the industry and is one of the top brokers in this specialist field.