VA Loan Assumption

VA loans come with unique benefits, including the ability to transfer your mortgage to another borrower. This process, known as a VA loan assumption, can be a useful option for homeowners looking to sell and for buyers hoping to secure a lower interest rate.

Whether you are moving due to a permanent change of station (PCS) or simply relocating, understanding how VA loan assumptions work can help you decide if it is the right path. Here is what to know about eligibility, costs and potential risks.

What Is a VA Loan Assumption? 

A VA loan assumption allows a qualified buyer to take over an existing VA mortgage from the current homeowner, even if the loan has not been paid off.

The buyer who assumes the mortgage becomes responsible for the loan’s remaining balance, its interest rate and the monthly mortgage payments. If the home’s value is higher than the remaining loan balance, the buyer must typically pay the difference in cash or obtain secondary financing.

The original borrower may remain liable for the loan unless they obtain a formal release of liability from the lender or VA. Without that release, they could still be responsible if the new borrower defaults. According to VA Pamphlet 26-7, this liability may continue unless the loan is assumed by a creditworthy buyer who agrees to take over the payment obligation.

Who Can Assume a VA Loan?

VA loans are approved for veterans, current military members and surviving spouses who qualify. VA loan assumptions, however, require only that the new borrower – veteran or not – is financially qualified for the mortgage.

So, to assume a VA loan, the new borrower must:

• Meet VA credit and income requirements
• Be able to assume all mortgage obligations
• Pay the VA funding fee, which is 0.5% of the loan balance

How VA Home Loan Assumptions Work

For VA loans closed after March 1, 1988, lenders must process assumption requests, but they can deny borrowers who do not meet credit and income requirements. Loans closed before 1988 fell under previous VA loan guidelines that made them “freely assumable.”

Sellers must ask for and obtain a mortgage liability release from their lender or servicer to participate in a VA loan assumption. Without a release of liability, the sellers’ credit could be harmed if buyers fail to make payments or default on the loan.

Situations That Don’t Require VA Approval

In some cases, a loan transfer does not require approval from the lender or the VA. According to VA Pamphlet 26-7, these situations generally involve transfers where occupancy rights are not changing.

Examples include:

• Creating a lien or other encumbrance on the property
• Financing household appliances
• Transfers after the death of a borrower or joint tenant
• Adding a spouse or child as a joint owner
• Transferring the property into a trust where the borrower remains a beneficiary
• Property transfers resulting from divorce, legal separation or a settlement agreement
• Short-term leases of three years or less without a purchase option

State laws and lender requirements may still apply, so borrowers should confirm the rules with their loan servicer.

Pros and Cons of VA Loan Assumption

Assuming a VA loan can benefit both buyers and sellers in some situations. Here’s a list of the pros and cons.

Pros of VA Loan Assumption

• No military service is required to assume a VA loan, however, sellers can regain full VA loan entitlement if another veteran assumes the loan.
• At 0.5%, the funding fee on a VA loan assumption is less than a typical VA loan.
• Buyers can save on closing costs. 
• Interest rates remain the same, which is particularly beneficial if the original borrower locked in at a low rate.

Cons of VA Loan Assumption

• If a civilian assumes the loan, the original borrower won’t get their VA loan entitlement back.
• For VA loans closed after March 1, 1988, lenders are required to process assumption requests, but they can deny borrowers who do not meet credit and income requirements.
• If VA approval is necessary, the process can be long and tedious.

VA Loan Assumption Fees

Buyers who assume a VA loan must pay a VA funding fee equal to 0.5% of the loan balance on the date of transfer. Lenders may also charge a reasonable fee for VA loan assumptions, including the cost of credit reports and a processing fee, which they may charge in advance.

According to VA’s loan rules, these fees max out at “$300 plus the actual cost of a credit report” for lenders with automatic VA loan approval authority. 

Lenders who manually submit VA loan transactions can charge fees of $250, “plus the actual cost of a credit report,” or the maximum amount allowed by state law, according to the VA’s lender handbook. 

State laws may require additional fees. Ask your lender what fees apply in your state. 

Who Is Exempt From the VA Assumption Funding Fee?

Certain people are exempt from paying the fee:

• Veterans who receive (or are entitled to receive) VA compensation for a service-connected disability.
• Veterans who are eligible to receive compensation following a pre-discharge disability exam or rating.
• Surviving spouses of veterans who died in service or from a service-connected disability.

VA Loan Assumptions and Divorce

VA loan assumption policy provides options for veterans and spouses who divorce. Veterans can petition for release from the loan and allow the spouse to assume the mortgage when “the ex-spouse was jointly liable on the loan with the veteran prior to the divorce,” according to the VA. 

VA loan rules also permit ex-spouses to seek a release of liability, awarding the property to the veteran.

Can You Get Another VA Loan After an Assumption?

VA loan rules permit an otherwise eligible VA borrower to apply for a new VA mortgage loan in the wake of a prior VA loan assumption under certain conditions.

If another qualified VA loan beneficiary takes over the loan, that buyer would substitute their own VA loan entitlement for the previous owner’s. In turn, the VA restores the previous owner’s loan entitlement. 

To do this, the original borrower must first present a liability release from the original VA loan. Then, the buyer must fill out and submit a substitution of entitlement (SOE), VA Form 26-8106. Without this certification, the original borrower’s entitlement remains tied to the house until the new buyer repays the loan. 

Then, the original borrower must send the VA a request for a restoration of VA loan entitlement. Learn more about VA loan entitlement restoration here.

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