VA loan assumptions are a major gray area for many borrowers. There’s not a lot of widespread understanding on this topic, and yet to some it is one of the most advantageous things about the VA loan program. A common question about VA loan assumptions comes from the children of parents who used their VA benefits to purchase their home. Often, the parents pass away before the home is fully paid off, and one of the children inherits the home, which is financed with a VA mortgage. The child wants to know if they can assume the VA loan, who they can contact if that is the case, and what fees to expect in order to assume it. The first clarification is that yes, VA loans are assumable, but has to be done in coordination with the lender, and may be required to get VA approval in order for the assumption to take place.
VA Pamphlet 26-7 provides guidance on VA loan assumptions and what is required for them. It states that for any loans after March 1st of 1988, the transferring (or assumption) of a loan needs to be approved by the lien holder if they have automatic authority. If the lien holder doesn’t have automatic authority, then they have to send it up to the VA for the underwriting process. From the Pamphlet: “Transfers of ownership on properties securing loans for which commitments were made on or after March 1, 1988, must have the prior approval of the loan holder or its authorized servicing agent if either of them have automatic authority. If neither the holder nor the servicer has automatic authority, the servicer must submit a credit package to VA for underwriting.”
The Pamphlet also provides instructions to the lender about how to carry out the VA loan assumption. For a seller trying to have someone assume their loan, they must apply for approval before any transaction takes place. If the lien holder has automatic authority, then the lien holder assesses the application and makes sure that the request complies with all of the requirements for a VA loan to be assumed. Where the lien holder has no automatic authority, the VA takes over. The text from the Pamphlet: “A seller must apply for approval of the transfer prior to completing the sale. Servicers and holders with automatic authority must examine the application to assess compliance with the provisions of 38 U.S.C. 3714. VA will make the determination in a case where neither the servicer nor the holder has automatic authority, following receipt of a complete application package from the servicer.”
For the loan to be assumed, it needs to be current (on track with its payments). If it’s not current, it needs to be brought up to being current before the assumption can take place. Also, the person that will be taking over the loan needs to have sufficient credit to qualify. While it may not always be the case, it is always safe to assume that the new borrower needs to be in a credit situation that would allow them to make a new purchase of a home for the same value as the loan they are assuming. Additional restrictions on or requirements for new borrowers assuming a loan may vary lender to lender, but will always center around making sure that the chances of default on the loan do not increase with the assumption. If you’re considering assuming a loan, or letting someone assume your VA loan, make an appointment with your lender and discuss their expectations for a VA loan assumption. You’ll be glad you did.
If the assumption is able to take place (it’s approved by either the lender or the VA, depending on if the lender has automatic authority), there will be fees associated with the assumption. The fee can be collected in advance of the assumption, and is dependent on whether the lender has automatic authority. The fee may vary slightly from lender to lender and even from assumption to assumption, but the maximum fee that can be charged by a lender with automatic authority is $300 plus what the credit report actually costed. If the lender has no automatic authority, then the maximum fee that can be charged is $250 plus the actual cost of the credit report.