Deciphering the VA Lender’s Handbook Chapter 5 Part 5
The ability to assume a VA loan and have someone else assume your VA loan is one of the coolest features of the VA loan program. Coincidentally, or perhaps not so coincidentally, it can also be one of the most complicated, especially for the lender. In the previous articles for chapter 5, we talked about processing prior-approval loans and automatically approved loans, and now we’re going to shift focus onto one of the more detailed portions of the VA Lender’s Handbook: Processing Loan Assumptions. Since this section is quite long, we’ll be breaking it up into parts and covering only a portion with each article. Let’s start by giving some general information about VA loan assumptions.
In certain circumstances, the property being financed by a VA loan can be sold even though the loan is not paid in full. Borrowers who sell their properties under this circumstance are still responsible for any loss that the VA may incur as a result of a future default and claim by the holder of the loan. The exception to this rule is when the property is sold to a creditworthy purchaser who agrees to assume the payment obligation. This is called an assumption. Assumptions can be a great opportunity for the new owner of the home, and is often done from a parent to an adult child, or from one sibling or good friend to another.
So who can process loan assumptions? In other words, if you’d like to let someone assume your loan, or would like to assume someone else’s loan, are you going to be able to talk to your current loan holder, or will you need to find someone else. The good news is that now any loan holder or servicer with automatic authority can access the new VA Loan Electronic Reporting Interface (VALERI). This didn’t use to be the case, but for those looking to do a loan assumption, it will be simpler than ever. Loan holders and servicers with automatic authority can determine creditworthiness on all assumption approval requests that come their way.
Obviously, the servicers with automatic authority must still follow the VA underwriting guidelines for determining creditworthiness, but they can still generally authorize loan assumption approval on the behalf of the VA. This is one of the advantages of working with a servicer that has automatic authority, as opposed to a lender that requires prior approval on all VA loans.
There are many instances where the servicer does not have automatic authority, but the holder of the loan does. For a servicer without automatic authority, they must send the request up to the holder for determining creditworthiness. In the event that neither the servicer nor the holder has automatic authority, it is up to the servicer to put together a complete credit package and submit it to the VA. The package must include a copy of the original purchase contract and the current status of the loan, and will be submitted to the Loan Production section at the local VA Regional Loan Center. The assumption will be underwritten there.
As the current borrower who is wanting to let someone else assume the home, it’s important to know that if you bought the home after March 1, 1988, you must have the approval of either the holder of your loan or the servicing agent if one of them has automatic authority, and even if they don’t, you still need to work through them to send a credit package to the VA for underwriting and approval. You cannot transfer ownership of your home without working through your loan servicer. Once you’ve applied with your servicer for approval, the application will be reviewed to make sure it complies with applicable VA laws, guidelines, and provisions, and either the servicer, loan holder, or the VA will make a determination whether the application meets the requirements.
The next article will go over the requirements for an application for a loan assumption to be approved. Knowing what those requirements are will answer many questions right off-the-bat when you are considering a loan assumption, and will also help you streamline the process to get approved to conduct a loan assumption.