VA assumable loan

 

A VA assumable loan allows a buyer to take over the seller’s existing VA loan, including its current interest rate and remaining balance. This can be an attractive option for buyers, especially if the original loan has a lower interest rate than currently available. Here’s how it works and what happens to the seller’s VA entitlement:

Key Points About VA Assumable Loans

Assumption Process:

The buyer takes over the remaining balance, terms, and interest rate of the seller’s VA loan.

The buyer must qualify with the lender to assume the loan. This includes meeting income, credit, and debt-to-income (DTI) ratio requirements.

 

Entitlement Transfer:

The seller’s VA entitlement remains tied to the loan unless the buyer is also a qualified VA borrower and substitutes their entitlement for the seller’s.

If the buyer is not a VA borrower or doesn’t substitute their entitlement, the seller’s entitlement is still tied to the assumed loan. This could limit the seller’s ability to use their VA loan benefits in the future unless the loan is paid off.

 

Down Payment Requirements:

If the home’s sale price exceeds the loan balance, the buyer may need to cover the difference with a down payment.

 

Costs and Fees:

The assumption may have a VA funding fee, typically 0.5% of the loan balance.

The buyer might also incur closing costs.

 

Ownership and Liability:

After the assumption, the buyer is responsible for future payments and any obligations tied to the loan.

The seller is released from liability if the lender and the VA approve the assumption.

 

Example Scenario

The seller has a VA loan with a $300,000 balance and a 3% interest rate.

The home’s current market value is $350,000.

A buyer assumes the loan and pays $50,000 (the difference) as a down payment.

If the buyer is a non-VA borrower, the seller’s VA entitlement remains tied to the loan until it’s paid or refinanced.

Does the person assuming the loan have to be a veteran or have a VA entitlement?

No, the person assuming a VA loan does not have to be a veteran or have VA entitlement. However, there are essential distinctions based on whether the buyer has a VA entitlement:

If the Assumer is a Veteran with VA Entitlement:

The buyer can substitute their VA entitlement for the seller’s.

This releases the seller’s entitlement, allowing the seller to reuse it for future VA loans.

To qualify for the loan assumption, the buyer must still meet the lender’s requirements (creditworthiness, income, etc.).

 

If the Assumer is NOT a Veteran or Does Not Have VA Entitlement:

The loan can still be assumed, but the seller’s VA entitlement remains tied to the loan.

This means the seller cannot fully restore their entitlement until the loan is paid off or refinanced.

The buyer must meet the lender’s qualification criteria, including credit and income standards.

 

Why This Matters:

For veterans selling their home with an assumable loan, it’s ideal if the buyer has VA entitlement and can substitute it. This ensures the seller’s entitlement is restored.

If a non-veteran assumes the loan, the seller’s entitlement remains “locked” but can still be used if the seller has remaining entitlement and qualifies for another VA loan.

 

If the buyer defaults on the loan, what is the seller’s Exposure?

If the buyer defaults on an assumed VA loan, the seller’s exposure depends on whether their VA entitlement is still tied to the loan.

Here’s how it works:

Scenario 1: Seller’s VA Entitlement is Released

If the buyer is a qualified veteran who substitutes their VA entitlement during the assumption process:

The seller is no longer liable for the loan.

The buyer’s entitlement is now tied to the loan, and any default will not affect the seller’s VA benefits or credit.

The VA guarantees the loan under the buyer’s entitlement.

 

Scenario 2: Seller’s VA Entitlement Remains Tied

If the buyer is not a veteran or does not substitute their entitlement:

The seller’s VA entitlement remains tied to the loan, even though they no longer own the property.

If the buyer defaults:

VA Entitlement Impact: The seller’s entitlement will be reduced by the amount the VA has to pay the lender as part of the loan guarantee. This could make it harder or impossible for the seller to use their VA loan benefits in the future.

Credit Impact: The seller’s credit is not directly affected because the buyer assumed the loan and payment liability. However, the default still affects the seller’s ability to use their VA loan benefits.

Example Impact

The seller has a $300,000 VA entitlement tied to the assumed loan.

The buyer defaults, and the VA pays the lender $75,000 under the loan guarantee.

The seller’s VA entitlement is reduced by $75,000 until the buyer repays the loan in full or the seller restores their entitlement.

 

How to Protect the Seller

Substitution of Entitlement: Always try to ensure the buyer has VA entitlement and substitutes it during the loan assumption.

Qualified Buyers: Work with the lender to ensure the buyer is financially stable and capable of managing the loan.

Release of Liability: Ensure the lender and VA formally release the seller from liability during the assumption process.

Restoring a VA entitlement after a loan default can be complex, but it is possible under certain conditions. Here’s how the process works:

VA Entitlement Restoration After Default

If the buyer who assumed the VA loan defaults and the VA pays a claim to the lender under the loan guarantee, the seller’s entitlement is reduced by the amount paid. To restore the entitlement, the following options are available:

1. Loan is Paid Off in Full

How it Works: If the buyer who assumed the loan repays it in full (e.g., through refinancing or selling the property), the VA loan is satisfied, and the entitlement tied to that loan can be restored.

Steps for the Seller:

Request a “Certificate of Eligibility” (COE) from the VA to verify entitlement restoration.

The VA will restore entitlement once the loan is fully satisfied.

 

2. the Seller repays VA Loss

How it Works: If the VA paid a claim to the lender after the buyer defaulted, the seller can repay the VA the amount of the claim to restore their entitlement.

Example:

The buyer defaults, and the VA pays $50,000 to the lender under the guarantee.

The seller can repay the $50,000 to the VA to restore the portion of entitlement tied to that loan.

Steps for the Seller:

Contact the VA Regional Loan Center to determine the repayment amount and process.

 

3. Using Remaining Entitlement

How it Works: If the seller has a remaining entitlement not used for the assumed loan, they can still purchase another property.

Example:

The seller originally had $100,000 of entitlement, with $50,000 tied to the assumed loan.

After the buyer defaults, $50,000 of entitlement is reduced, but the remaining $50,000 is still available for future use.

Limitations:

The available entitlement may limit the loan amount the seller can get without a down payment.

 

4. Partial Restoration

How it Works: If the seller repays only part of the VA claim (e.g., the amount needed to restore enough entitlement for a new loan), partial restoration is possible.

Example:

The seller repays $25,000 to the VA instead of the entire $50,000, restoring that portion of their entitlement.

 

Steps for Restoring Entitlement

 

Obtain a Certificate of Eligibility (COE):

Visit the VA eBenefits portal or work with a lender to obtain the COE.

The COE will indicate how much entitlement remains or has been restored.

Contact the VA.

Please work with the VA Regional Loan Center to determine the necessary steps to restore entitlement.

Provide Documentation:

Submit proof of loan repayment or repayment to the VA (if applicable).

 

Key Considerations

Repayment is Not Always Mandatory: If you’re using the remaining entitlement for a smaller loan, repayment to restore the full entitlement might not be necessary.