Can Anyone Assume a VA Loan? A Step-by-Step Overview

One of the most frequently asked questions about VA Loan Assumptions is whether they are limited to veterans or military members. The short answer is no — veterans and non-veterans can assume a VA Loan, provided they meet certain requirements. However, there are important nuances to consider:

• Veterans and eligible military members: When another eligible VA borrower assumes the loan, the original veteran seller’s entitlement can be restored, allowing them to use their VA Loan benefits again in the future. 
• Non-veterans: Non-veterans can also assume a VA Loan if they meet the lender’s credit and income requirements. However, in this case, the original borrower’s VA entitlement remains tied to the loan until it is fully paid off. Learn more about entitlement restoration at the VA Loan Guaranty Service.

Assuming a VA Loan is not as simple as signing on the dotted line. Specific eligibility criteria must be met, including:

1. Lender approval: The lender holding the VA Loan must approve the assumption. They will evaluate the buyer’s financial stability to ensure they can continue making payments.
2. Creditworthiness: The buyer must meet the lender’s credit score requirements. While VA Loans typically have more lenient credit standards, the exact criteria will vary by lender.
3. Income verification: Buyers must demonstrate sufficient income to cover the loan payments. This includes submitting financial documents such as pay stubs, tax returns, and bank statements.
4. Funding fee: A VA Loan Assumption requires the buyer to pay a funding fee equal to 0.5% of the loan balance. For more information about funding fees, refer to the VA funding fee chart. Certain individuals, such as veterans with service-connected disabilities, may be exempt from this fee.

If you’re considering assuming a VA Loan, here’s a detailed step-by-step guide to help you navigate the process:

1. Confirm Loan Assumability

Not all VA Loans are assumable. It’s essential to check with the current lender to confirm that the loan can be transferred to another party. Typically, VA Loans issued after March 1, 1988, include a clause requiring lender approval for assumptions. This detail is outlined in the VA Lenders Handbook.

2. Find a Buyer or Seller

For sellers, finding a buyer interested in assuming the VA Loan is the first step. Highlighting the potential benefits, such as a lower interest rate, can make your property more attractive in the marketplace. For buyers, searching for properties where the seller’s VA Loan is assumable can help you take advantage of favorable loan terms.

3. Submit an Application

The buyer must submit an application to the lender for approval. This process involves providing detailed financial documentation, including:

• Proof of income (e.g., pay stubs, tax returns, bank statements)
• Credit history
• Employment verification.

4. Pay the Funding Fee

As mentioned earlier, the buyer will need to pay a funding fee of 0.5% of the loan balance. This fee can either be paid upfront or rolled into the loan balance. Buyers who qualify for a waiver should provide the necessary documentation to the lender.

5. Obtain a Release of Liability

For the seller, securing a release of liability is a crucial step. This document ensures that the seller is no longer responsible for the loan once the assumption is complete. Without this release, the lender could pursue the original borrower for payment if the buyer defaults.

6. Finalize the Assumption

Once all the requirements are met, the lender will approve the assumption, and the loan will be transferred to the buyer. The buyer will then begin making payments under the original loan’s terms.

VA Loan Assumptions offer several potential benefits:

1. Lower interest rates: Buyers can take advantage of the original loan’s interest rate, which may be significantly lower than current market rates. This can lead to substantial savings over the life of the loan.
2. Reduced closing costs: Compared to obtaining a new loan, the closing costs associated with a loan assumption are often lower, saving buyers money upfront.
3. Simplified process: Assuming an existing loan can streamline the home financing process, as buyers don’t need to go through the entire loan origination process.
4. Seller benefits: For sellers, offering an assumable VA Loan can make their property more attractive to buyers, particularly in a rising interest rate environment.

While VA Loan Assumptions can be beneficial, there are potential drawbacks to consider:

1. Entitlement restoration issues: If a non-veteran assumes the loan, the original borrower’s VA Loan entitlement remains tied to the loan. This can limit the seller’s ability to use their VA Loan benefits in the future.
2. Lender approval: The assumption process requires lender approval, which can be time-consuming and involves meeting specific credit and income requirements.
3. Funding fee: The buyer must pay a funding fee, which can add to the upfront costs of the assumption.
4. Equity requirements: If the home’s value has appreciated significantly, the buyer may need to pay the difference between the loan balance and the home’s market value upfront, as this amount cannot be financed through the loan assumption.

VA Loan Assumption can be a great choice under certain circumstances:

• Rising interest rates: When market interest rates are higher than the existing loan’s rate, assuming a VA Loan can save buyers thousands over the life of the loan.
• Favorable loan terms: If the existing VA Loan has terms that are better than what’s currently available, such as no private mortgage insurance (PMI), it’s worth considering.
• Mutual agreement: Both the buyer and seller stand to benefit, with buyers securing better terms and sellers attracting more interest in their property.