Did you know that VA loans were assumable? This means that a ‘buyer’ can come in and take over your mortgage where you left off on it. This means they get your interest rate, remaining principal balance, and the remainder of your term.
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While the VA loan is assumable, not just anyone can assume it. You have to qualify for it, which starts with whether or not you are a veteran. If you aren’t a veteran, you may still be able to assume the loan, but it will depend on the seller’s willingness to accept this situation.
Below we discuss what happens when a buyer assumes a VA loan and how the seller is affected.
Veterans can Assume a VA Loan
If you are a veteran that has entitlement available, you may have the easiest time assuming a VA loan. You will step in and take over where the seller left off on his loan. Whatever the principal balance is on the seller’s loan, you will need to give up the equivalent in your entitlement. This means your entitlement becomes tied up in the home.
This is good for the seller because he is able to request that his entitlement is reinstated for him to use to buy another home. In order for you to release your entitlement from the home, you’ll have to pay the mortgage off in full and sell the home, unless you turn around and let someone else assume the loan in the future.
Non-Veterans can Assume a VA Loan
Non-veterans can also be a candidate to assume a VA loan, but there’s a catch for the seller. The seller must keep his entitlement attached to the home. The lender isn’t going to let someone assume the loan that doesn’t have entitlement. If they did that and the buyer defaulted on the loan, there wouldn’t be any type of guaranty. In other words, the lender wouldn’t get their money back. With entitlement, the VA guarantees 25% of the loan amount. This means the VA pays the lender 25% of the amount they lost.
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It’s rare for non-veterans to assume a loan just because of the risk the seller takes leaving their entitlement on the loan. If the buyer defaults and the seller’s entitlement is tied to the loan, the seller can lose his entitlement. This is no way to get it reinstated – you lose it for good. This is why most sellers stick to allowing only veterans with entitlement to assume their loan.
Qualifying for Assumption
Veteran or not, everyone must qualify for the assumption before it can go through. The qualification rules generally depend on what the lender wants, but at a minimum, they must require:
- 620 credit score (or higher depending on the lender’s rules)
- Maximum 43% total debt ratio
- Proof that you will live in the home as your primary residence
- Proof that you have enough disposable income to cover the daily cost of living based on where you live and your family’s size (the VA has requirements for each area of the country/family size)
- Proof that you haven’t had a foreclosure or bankruptcy in the last 24 months
So while anyone can assume a loan, technically it’s for veterans. Sellers do benefit by offering a loan assumption if they have great terms on their loan and want to pass it along to a willing buyer. It can give them a better chance at selling their home, especially in a slower market. Of course, the buyer must be able to come up with the difference between the loan amount and the home’s value (agreed upon purchase price) to pay in cash. This will limit who will be able to assume the loan, but if you are eligible, it can be a great way to save money.
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