VA Home Loan Assumptions 101

The VA home loan is one of the most popular military benefits. It can be used to be a new or pre-owned home, and qualifying VA borrowers are offered more competitive interest rates than for other types of mortgage loans. The zero downpayment option is also an important benefit.

Did you know the VA loan program also allows a VA borrower to assume a VA loan from another veteran? A VA loan applicant may take over an existing VA home loan, and VA loan assumptions may, under the right circumstances, also allow civilians to assume a VA loan.

VA loan assumptions allow a buyer to take over a seller’s existing VA loan. This process requires a formal release of liability for the seller and a creditworthiness check for the buyer. VA loan assumptions require the lender’s participation; neither the current owner nor the future owner can perform a legal VA loan assumption without the lender.

VA loan assumptions should include a release of liability that protects the seller if the buyer defaults on the assumed loan. The Department of Veterans Affairs (VA) or the loan servicer issues this release after qualifying the assumer.  However, a release of liability does not automatically restore the seller’s VA loan entitlement; it remains tied to the property until the loan is paid in full.

A process called Substitution of Entitlement (SOE) is one way to handle the VA loan entitlement issue. An SOE requires the buyer to be an eligible veteran with sufficient entitlement of their own.

The buyer must agree to substitute their entitlement for the seller’s. If the buyer is a civilian or a Veteran who does not substitute entitlement, the seller’s benefit remains “encumbered.” This limits the seller’s ability to use a $0 down VA loan for a subsequent home purchase.

Veterans selling their homes must calculate the effects of an assumption on their remaining VA loan entitlement. When an SOE occurs, the buyer’s entitlement replaces the seller’s dollar-for-dollar. The seller then regains their full VA loan benefit immediately. In cases where a civilian assumes the loan, the seller must rely on any remaining entitlement to purchase a new home.

VA home loan limits no longer apply to qualifying veterans with full entitlement, but they do apply to those with partial entitlement. Veterans with no remaining entitlement must provide a down payment for their next purchase. They may also wait until the assumed loan is completely satisfied.

Buyers must meet the same credit and income standards as a new VA loan applicant. The loan servicer evaluates the buyer’s debt-to-income (DTI) ratio, residual income, and credit history.

The loan must be current at the time of the assumption. The buyer is responsible for paying the standard VA funding fee, unless they are a disabled veteran who is exempt from the VA loan funding fee under the service-connected disability exemption guidelines. Unlike other home loans, the VA loan assumption funding fee cannot be financed into the loan balance; it must be paid in cash at closing.

Related: How to Apply for a VA Mortgage

Buyers are responsible for the difference between the sales price and the existing loan balance. This is known as an “equity gap” and often requires a cash down payment. If a home is $500,000 and the assumable loan balance is $350,000, the buyer must provide $150,000 to the seller.

Closing costs for assumptions may be lower than standard home purchases. Lenders may charge a flat processing fee, and there may be additional costs, including credit reports, recording fees, and title examination fees.

The VA lender manages the assumption, notifying the buyer and seller of a decision within 45 days of receiving the completed application. If the servicer denies the assumption, there is a 30-day window to appeal the decision to the VA.

Once approved, the lender reports the transfer of ownership and release of liability to the VA. The seller must confirm receipt of VA Form 26-6381, the official evidence of their release from personal liability to the government.