One of the unique aspects of the VA loan is its ability to be assumed. This means a buyer can take over the loan right where the seller left off. This only works if the buyer has the cash difference between the purchase price of the home and the outstanding loan balance.
The good news is that the buyer does not have to get their own financing and they do not even have to be a veteran. However, there are guidelines buyers must meet and consequences sellers may face.
How Can a Non-Veteran Assume a VA Loan?
Even though a buyer did not serve in the military, they can assume the VA loan. However, they must qualify for it, much like they would have to qualify for a loan they sought on their own. In other words, the buyer must meet all VA loan requirements including:
- Minimum credit score of 620
- Maximum total debt ratio of 43%
- Enough disposable income each month based on your location and family size
- Stable employment for the last 2 years
- Stable income or even increasing income over the last 2 years
As stated above, the buyer must also prove they have the funds to pay the seller the equity he has in the home. For example:
Let’s say you want to buy a home for $150,000. The seller currently has a $50,000 loan balance on it. You want to assume the loan. In order for it to work, you’d have to pay the seller $100,000 in cash and then take over the loan, assuming the lender approves it.
Keep in mind, some lenders allow the assumption of a VA loan by a non-veteran and some don’t. You won’t know until you ask. In addition, many lenders have additional requirements on top of what the VA requires. This helps them lessen the risk that assumptions create.
The Benefit of Loan Assumption for the Buyer
You might wonder why a buyer would want to come up with a large chunk of cash and then take over an existing mortgage. There are a few instances where an assumption makes sense:
- If the interest rate on the current mortgage is lower than today’s rates, it makes sense to assume the loan and pay less interest
- If the buyer can save on closing costs by assuming the loan, he/she could save thousands of dollars
- The buyer has the cash to make up the difference between the purchase price and the loan balance
Buyers do have to pay a 0.5% funding fee on the transaction though. On a $50,000 loan balance, that means $250. This is obviously much less than closing costs on a standard loan.
The Consequences of Loan Assumption for the Seller
There is one consequence sellers must be aware of when considering the loan assumption. They could lose their entitlement. If you let a non-veteran assume your loan, your entitlement stays tied to the loan until it is paid in full.
This is different if you let a veteran assume your loan. If the veteran has entitlement available, you may be able to ‘swap’ your entitlement out. This leaves you free to use your entire amount of entitlement. If you can’t swap it out or you let a non-veteran assume your loan, you still have your remaining entitlement available for possible use.
Sellers that benefit the most from this situation are those that do not need their entitlement moving forward. They either have the cash to buy a new home outright or they will secure another type of financing, such as conventional financing.
An assumed loan is not as common today as it once was, but it is still a possibility. Whether you are the buyer or the seller, you should look into the possibility to see how much money you could save. If it works in your benefit, talk to the lender to see what options are available to you.