VA Loan Assumptions
You may have heard of a VA mortgage assumption but my guess is this is an unfamiliar term for most buyers. An assumption is generally defined as a purchase transaction where the buyer takes over the liability of an existing mortgage from the seller.
In a typical purchase transaction, the buyer is released of all liability upon sale. At closing, the buyer’s existing mortgage is paid in full and the seller obtains a new mortgage through their lender. The seller can also restore his VA mortgage entitlement upon sale.
This isn’t the case with an assumption. Instead of paying off the loan and closing out the seller’s mortgage, the buyer takes it over (assumes the mortgage) and continues to make the payments. Even though the buyer isn’t obtaining a new mortgage the current mortgage servicer has to approve the assumption. Not all lenders and servicers allow an assumption.
The important takeaway here is that it’s still the same mortgage and this results in the buyer being on the hook for the loan if payments aren’t made, unless a release of liability in writing is received from the loan servicer.
Additionally, the seller’s VA mortgage entitlement may also remain tied to the mortgage.
Assumptions are beneficial to a buyer if:
The current mortgage has an interest rate lower than the rates available at the time of sale, the buyer can continue to pay at the lower interest rate.
The parties can avoid settlement charges.
The buyer can pay cash for the difference between the agreed sales price and the balance of the current mortgage (instead of taking out a second mortgage at a higher rate).
Can I Use My VA Entitlement After an Assumption?
The short answer is yes, you can likely use your remaining VA entitlement after an assumption. If the person assuming the loan also has VA entitlement, they can look to substitute their entitlement for that of the seller’s. A substitution of entitlement can free up the seller’s entitlement for use on another home.
Otherwise, the seller will have to look into using his/her second tier entitlement or any remaining portions of the initial entitlement. If you’re able to move forward with a VA loan assumption and your entitlement remains tied to the property, you can talk with your VA mortgage specialist to determine what entitlement you have remaining.
