Tips & Special Topics
How VA Loan Assumption Can Save Money
Added February 24, 2011 | Updated March 2, 2011
VA loan assumption can make sense for many VA-eligible borrowers, especially if it saves them money.
“Assumability” is just one of many attractive features of the VA Home Loan Guaranty Program. A VA home loan held by one VA borrower, in certain cases, can be assumed by another VA-eligible borrower. There are reasons why one VA borrower would assume the liability for another borrower’s home loan. Some of them include:
• The current VA loan has a lower interest rate than what is available today
• The buyer’s entitlement is tied up in another VA loan and the seller will allow the use of their entitlement to the borrower
One of the biggest reasons borrowers cite for assuming a VA loan is because the interest rate on the existing loan is lower than that which can be obtained in the current lending market. For example, if the interest rate on the existing loan is 4.5 percent and the going interest rate has been hovering around 6.5 percent, then it makes sense to assume the mortgage with lower interest. A two percent difference in percentage rates over time can save thousands.
When market interest rates are low, there are typically fewer VA loan assumptions. For example, between 2008 and 2010 when interest rates were steadily falling to historic lows, many VA-eligible borrowers locked in low interest rates on their own mortgages. VA loans with historically low interest rates make attractive targets for assumption when interest rates go up.
In addition to a lower interest rate, VA loan assumption can save the buyer money in fees alone. The VA funding fee for zero-down purchase loans can run from 2.15 to 3.30 percent depending on the borrower and the situation. The VA funding fee for a borrower assuming a VA loan is only .5 percent. This can save $7,000 upfront for some borrowers based on a $250,000 VA purchase loan.
VA loans closed prior to March 1, 1988, are freely assumable, meaning that the seller may allow the loan to be assumed without the approval of the VA or the loan holder. Veterans fitting this description looking to complete a VA loan assumption should contact the VA for instructions.
VA loans closed after March 1, 1988 will need approval from the loan holder in order for the seller to get release of liability (ROL) and approval for assumption. Three key elements must be present:
• VA loan payments must be current or brought current at closing
• Buyer must be VA-eligible, a good credit risk and have the ability to pay the existing VA loan
• Buyer must agree to assume the veteran's liability to the federal government
Once a VA loan has been approved for release of liability, the seller can either allow his or her entitlement to be used by the buyer, or the VA-eligible buyer can replace the seller’s VA entitlement with his or her own entitlement. If the former occurs, the seller cannot restore his or her entitlement until the original loan is paid in full. The latter requires the borrower to have available entitlement.
When a buyer uses his or her own entitlement in the VA loan assumption, the seller can restore entitlement almost immediately. In order for substitution of entitlement to take place, the following must be true:
• Buyer must occupy the property and complete VA Form 26-8106
• Buyer must have enough entitlement to replace the seller’s
• Both buyer and seller must have VA-eligibility
To restore entitlement, the seller will need to complete and submit VA Form 26-1880 to the Winston-Salem Office of Eligibility. The seller’s name is always removed from the VA loan upon closing whether entitlement is restored or not during a VA home loan assumption. Additionally, the seller’s credit is no longer associated with that VA mortgage.
For specific details about VA loan assumption, contact an experienced VA mortgage professional.
