Unlocking the Potential of VA Assumable Mortgages

In today’s ever-evolving real estate landscape, buyers and sellers alike are constantly seeking innovative financing options to maximize opportunities. One such option that has gained traction in recent years is the assumable mortgage, in particular for VA loans. We’ll delve into the intricacies of VA assumable mortgages, exploring what they are, how they work, and the pros and cons for both buyers and sellers. Whether you’re a prospective homebuyer looking to capitalize on favorable interest rates or a seller aiming to attract a wider pool of qualified buyers, we’ll provide invaluable insights and practical tips to navigate the world of assumable mortgages with confidence.

What is a VA Assumable Mortgage

An assumable mortgage is a unique financing option in the world of real estate that allows a homebuyer to take over the seller’s existing VA mortgage balance and payment for the remaining term of the loan. In other words, the buyer steps into the shoes of the original borrower, assuming both the interest rate and existing loan balance.

This concept differs from the traditional home buying process where the VA buyer secures a new mortgage loan at current interest rates from a lender to purchase the property. Instead, with an assumable mortgage, the buyer acquires the home with the existing loan, maturity date and interest rate in place, at the terms and conditions originally negotiated by the seller.

The buyer will not be working with a bank or mortgage lender of their choice to facilitate a mortgage assumption, they will work directly with the seller’s existing lender to complete the process.

The buyer does not have to be VA eligible to assume a VA loan, however, the sellers VA eligibility can only be restored after assumption if the buyer is VA eligible. If a non-Veteran assumes as VA loan, the sellers VA eligibility will remain with the loan until it is paid in full.

In the context of understanding assumable mortgages, it’s important to grasp how this process works for both the buyer and the seller.

How to Determine if a VA Assumable Mortgage is Obtainable

The first thing a potential buyer must do is determine if the assumable VA loan offered by the property seller is obtainable. Unlike a new purchase mortgage at current interest rates, a VA buyer attempting to assume a VA loan cannot finance 100% of the sales price. The VA buyer assuming a VA loan must make up the difference between the property sales price and the current mortgage loan balance in either all cash or a combination of cash plus 2nd mortgage/Home Equity Line of Credit (HELOC).

For example, if the sales price of the property is $500,000 and the remaining loan balance to be assumed is $400,000, the VA buyer will need a $100,000 cash down payment. If the VA buyer does not have all cash, they can attempt to obtain a 2nd mortgage/HELOC to cover part of the difference, usually up to a maximum of 90% total loan to value (LTV). That means the assumable 1st mortgage of $400,000 and 2nd mortgage of $50,000 for total loans of $450,000 (90% of the $500,000 sales price).

Once the VA buyer has determined that they are able to meet the down payment requirement to assume the VA loan and have confirmed that the seller’s current interest rate is low enough for this assumption to make sense for them, then they’ll want to move forward with the next steps below.

How VA Assumable Mortgages Work

For Buyers:

When considering an assumable mortgage, buyers must follow a specific process to seamlessly take over the existing loan:

1. Negotiation: The first step for a buyer is to negotiate the terms of the sale with the seller. This includes determining the purchase price, down payment, and any additional conditions. It’s crucial for both parties to reach a mutual agreement on these terms.
2. Qualification: After securing a fully executed purchase agreement, the next step is to qualify with the lender that holds the assumable mortgage (the seller’s current mortgage lender). The lender will assess the buyer’s creditworthiness, income stability, and financial history to ensure they can manage the mortgage payments.
3. Transfer of Mortgage: Once the buyer is qualified, the lender will transfer the existing mortgage into the buyer’s name. This process may involve a legal and financial review to ensure all parties are protected. It is important for buyers to be aware that this process can take several months to complete. The average time in 2023/2024 was 5 months from start to finish.
4. Assuming Responsibility: From this point forward, the buyer assumes responsibility for making the monthly mortgage payments. The terms of the original mortgage, such as the interest rate and maturity date, remain the same.

For Sellers:

Sellers who offer an assumable mortgage may attract a broader pool of potential buyers. Here’s how the process works from the seller’s perspective:

1. Offering an Assumable Mortgage: Sellers decide to offer an assumable mortgage as part of their property sale. This can be appealing to buyers, especially if the current interest rate is significantly lower than what they can obtain in the market. The seller should obtain as much information about this process from their lender upfront to be able to answer potential buyer questions about the qualifying process and whether or not the lender will allow them to establish a 2nd mortgage/HELOC to help make up the difference between the sales price and existing loan amount.
2. Negotiation: Sellers and buyers negotiate the terms of the sale, including the sale price and any additional conditions. Sellers should be prepared to provide their current loan balance and interest rate information to potential buyers and explain the advantages of assuming their mortgage.
3. Finding a Qualified Buyer: When a buyer expresses interest in assuming the mortgage, the seller should ensure the buyer qualifies with their lender. This will require the lender to verify the buyer’s creditworthiness and financial stability.
4. Transferring the Mortgage: Once the buyer qualifies and the terms are agreed upon, the lender facilitates the transfer of the mortgage to the buyer’s name. Sellers are then released from the mortgage obligation and their VA eligibility can be restored for future use (only if the buyer assuming their loan is VA eligible).

Benefits of an Assumable Mortgage

Assumable mortgages offer several advantages to both buyers and sellers in the real estate market. Understanding these benefits can help you make informed decisions when considering this financing option.

For Buyers:

1. Lower Interest Rates: One of the most significant benefits of assuming a mortgage is the potential for lower interest rates. If the original mortgage has a lower interest rate than the current market rates, the buyer can save money on interest payments over the life of the loan.
2. Reduced Closing Costs: Assumable mortgages often come with lower closing costs compared to obtaining a new mortgage. This is because there’s no need for the buyer to pay for a new appraisal, title insurance, or other fees associated with securing a traditional mortgage. With VA assumptions, the VA charges a 0.5% (of the loan amount) fee to the buyer.
3. Easier Qualification: Buyers may find it easier to qualify for an assumable mortgage since the interest rate and monthly payment are likely to be much lower than what the buyer could obtain at current market interest rates. See the example below for the approximate payment difference between a VA loan at an interest rate of 6% versus the payment on a VA loan secured at 3% between 2020 and 2022.

This Potential Savings Chart is for Illustrative Purposes Only.

For Sellers:

1. Wider Pool of Buyers: Offering an assumable mortgage can attract a more extensive pool of potential buyers, including those who may not qualify for a new mortgage due to the higher payment at current market rates.
2. Competitive Advantage: In a competitive housing market, an assumable mortgage can make a seller’s property stand out. It can be a selling point that distinguishes the property from others on the market.

Drawbacks of a VA Assumable Mortgage

While assumable mortgages offer several benefits, it’s essential to be aware of the potential drawbacks associated with this financing option. Understanding these drawbacks can help buyers and sellers make informed decisions.

For Buyers:

1. Lack of Cash and/or Additional Financing: VA buyers can finance up to 100% of the sales price with a new VA loan at current market interest rates. The vast majority of sellers have a loan balance much lower than their sales price due to the real estate appreciation over the last few years. Buyers who want to assume an existing mortgage must be prepared to provide at least 5% down payment on the sales price to bridge the gap between the sales price and existing loan balance. It is important to discover the current seller’s loan balance up front to determine if the assumption is even feasible based on the buyer’s cash position.
2. Delayed Closings: Buyers can obtain a new VA mortgage at current market rates in 30-45 days. The approximate 5 month timeline to complete the assumption process can be detrimental for many buyers depending on their current living situation.
3. Limited Eligibility: Most sellers will only be willing to offer their VA assumable loan to another Veteran. Although, non-VA eligible buyers can assume a VA loan, sellers are disincentivized from offering this benefit to non-Veterans since it will tie up their VA eligibility indefinitely.

For Sellers:

1. Delayed Closings: Sellers may not be able to wait the 4-6 months for the assumption transaction process to be completed. If they sell to a buyer who obtains their own mortgage financing, the process can be completed in 30-45 days.
2. Increased Carrying Costs: Sellers will incur higher carrying costs since they remain responsible for the mortgage payments while the assumption process is ongoing until they are released from the mortgage at completion. This can be as much as 3-5 additional mortgage payments to help facilitate an assumption for the buyer.
3. Potential VA Eligibility Loss: Sellers who allow a non-Veteran to assume their VA loan will likely have their VA eligibility tied up with the mortgage until it is paid in full.
4. Transfer Fees: Some lenders charge transfer fees when a mortgage is assumed, which can be an additional cost for the seller. Sellers should check their mortgage agreement for any such fees.

Eligibility and Qualifications for Assumable Mortgages

Assuming an existing VA mortgage comes with certain eligibility criteria and qualifications that buyers must meet. Understanding these requirements is crucial for both buyers and sellers considering this financing option.

For Buyers:

1. Credit Score: Lenders typically require buyers to have a good credit score to qualify for an assumable mortgage. While the specific credit score requirement may vary depending on the lender, a higher credit score generally improves the chances of approval.
2. Income Stability: Buyers must demonstrate sufficient income stability to afford the mortgage payments. Lenders evaluate the buyer’s income sources, employment history, and debt-to-income ratio to assess their ability to repay the loan.
3. Assets for Down Payment: Buyers assuming a VA mortgage should be prepared to have sufficient cash assets to cover the necessary down payment plus closing costs to make up the difference between the sales price and the existing assumable VA loan.
4. Qualification with 2nd Mortgage Lender: Before assuming a mortgage, buyers may need to qualify with a different bank or credit union that can provide supplemental financing to help bridge the gap between the sales price and existing VA loan balance. This involves submitting a full application, providing documentation of income and assets, and undergoing a credit check.

For Sellers:

1. Lender Approval: Sellers must obtain approval from their lender to allow the mortgage to be assumed by a new buyer. The lender will assess the buyer’s qualifications and determine if they meet the criteria for assuming the mortgage.
2. Financial Stability of the Buyer: Sellers may want assurance that the buyer has the financial stability to assume the mortgage responsibly. They may request documentation of the buyer’s income, assets, and creditworthiness during the negotiation period to verify their ability to make timely payments since a traditional mortgage lender will not be providing a pre-approval letter for the buyer.
3. Agreement on Terms: Sellers and buyers must agree on the terms of the assumption, including the sale price, down payment, and any additional conditions. Both parties should ensure that the terms are clearly outlined in the purchase agreement to avoid misunderstandings.
4. Transfer Process: Sellers should familiarize themselves with the process of transferring the mortgage to the buyer. This may involve working closely with their lender to complete the necessary paperwork and legal requirements.

Conclusion

Assumable VA mortgages represent a unique opportunity in the realm of real estate transactions, offering both buyers and sellers distinct advantages in today’s competitive market. However, it’s essential to weigh these advantages against the potential drawbacks and carefully consider the eligibility criteria and qualifications involved.

Whether you’re a buyer seeking a significantly lower interest rate and housing payment for your path to homeownership or a seller looking to attract interested buyers with an appealing financing option, assumable VA mortgages can be a valuable tool in your arsenal. By understanding the process, leveraging tips for success, and working with experienced professionals, you can navigate the world of assumable mortgages with confidence and achieve your real estate goals.