What are VA loans?
VA loans, also known as Veterans Affairs loans, are a type of mortgage loan provided to veterans, active-duty military personnel, and surviving spouses. These loans are backed by the U.S. Department of Veterans Affairs (VA) and offer several benefits, including lower interest rates and no down payment requirement.
However, what happens when a VA loan borrower wants to sell their property? Can the loan be assumed by another party? In this article, we will explore the process of VA loan assumption, its benefits, and drawbacks, and compare it with refinancing.
Assumption of VA Loans: What is it?
Loan assumption is a process where the existing mortgage loan is transferred to another party, who takes over the responsibility of making the mortgage payments. VA loans are assumable, meaning that a buyer can take over the loan from the seller, subject to certain conditions.
In the case of VA loans, the assumption can only be made by a person who is also eligible for a VA loan, i.e., a veteran, active-duty military personnel, or a surviving spouse. Moreover, the buyer must qualify for the loan based on the lender’s underwriting standards.
Benefits of Loan Assumption for Buyers
Assuming a VA loan can be beneficial for buyers in several ways. Firstly, they can avoid the time and costs associated with a new loan application, including credit checks, appraisals, and origination fees. Secondly, they can benefit from the lower interest rate and favorable terms of the existing loan, which may not be available in the current market.
Thirdly, assuming a loan can help buyers to avoid the down payment requirement, which is a significant advantage for those who may not have enough savings to make a down payment. Fourthly, assuming a VA loan can help buyers to close the deal faster, as the loan assumption process is generally quicker than applying for a new loan.
Benefits of Loan Assumption for Sellers
Sellers can also benefit from loan assumption, especially if they have a low-interest rate VA loan. By transferring the loan to the buyer, the seller can avoid paying off the loan and its associated fees. Moreover, the seller can attract more buyers by offering an assumable VA loan, as it can be an added incentive for those who are eligible for the loan.
How to Assume a VA Loan: Procedure & Requirements
Assuming a VA loan involves several steps, including finding an eligible buyer, obtaining the lender’s approval, and completing the necessary paperwork. The buyer must submit a loan assumption application to the lender, along with their financial information and credit score.
The lender will review the application and verify the buyer’s eligibility for the loan. The seller and the buyer must also sign a loan assumption agreement, which outlines the terms and conditions of the transfer. Once the lender approves the assumption, the buyer takes over the remaining balance of the loan and begins making payments.
Pros and Cons of VA Loan Assumption
Like any financial decision, VA loan assumption has its advantages and drawbacks. One of the main advantages is that it can save time and money for both the buyer and the seller. Moreover, it can help buyers to avoid the down payment requirement and benefit from the existing loan’s favorable terms.
However, VA loan assumption also has some potential drawbacks. For instance, the buyer may have to pay a funding fee to the VA, which can be a significant expense. Moreover, assuming a loan may not be the best option if the current interest rate is higher than the market rate, as the buyer may end up paying more interest over the loan’s term.
VA Loan Assumption vs. Refinancing
Another option for a VA loan borrower is to refinance the loan rather than assuming it. Refinancing involves obtaining a new loan with a different interest rate and terms to pay off the existing loan. Refinancing can be beneficial if the current interest rate is higher than the market rate, or if the borrower wants to change the loan term or type.
However, refinancing can also involve costs such as closing fees and appraisal costs, which can add up to thousands of dollars. Moreover, refinancing may not be an option for borrowers who have a low credit score or who have experienced a drop in income.
Conclusion: VA Loan Assumption – Is it Right for You?
VA loan assumption can be a viable option for both buyers and sellers, as it can save time, money, and resources. However, it is essential to weigh the pros and cons of this option and compare it with refinancing to make an informed decision. It is also important to work with a reputable lender and seek professional advice to ensure that the assumption process is smooth and hassle-free.