Assuming a VA loan can be a great opportunity for veterans, but it’s important to understand both the benefits and potential pitfalls before making a decision. In this post, we’ll break down everything you need to know about assuming a VA loan and provide you with the resources you need to make an informed choice.

What is Loan Assumption?

Loan assumption is when you, as a buyer, take over the existing VA loan on a property. This means you take on the current interest rate, remaining loan balance, and terms of the original loan. Instead of working with a mortgage lender, you’ll work directly with the loan servicer to complete the process.

Pros of Assuming a VA Loan

• Potentially Lower Interest Rate: If the existing VA loan has a lower interest rate than what’s available today, assuming the loan could save you a significant amount of money in interest over the life of the loan.
• No Need for a New Loan Application: The process of assuming an existing loan can often be simpler and quicker than applying for a new loan, especially if the current terms are favorable.
• No Down Payment (Possibly): Depending on the seller’s situation, you might be able to assume the loan without needing a down payment, saving you upfront costs.
• Avoiding Rising Interest Rates: If interest rates are on the rise, assuming a loan with a lower locked-in rate can provide long-term savings.

Cons of Assuming a VA Loan

• Lengthy Process: Assumptions often take longer than securing a new loan. The process can be slow, especially since you’re dealing with a loan servicer rather than a traditional mortgage lender.
• Dealing with the Servicer: Working with a servicer can be less flexible and slower than dealing with a mortgage lender, potentially leading to delays and frustrations.
• Blended Rate with Secondary Borrowing: If you need additional financing through a secondary loan, this could lead to a blended rate that’s higher than you might expect, increasing your overall monthly payments and the total cost of the loan.
• Entitlement Substitution Risks: When assuming a VA loan, you may need to substitute your own VA entitlement for the loan. This requires having enough entitlement to cover the loan amount. If you don’t have sufficient entitlement, you may not be able to substitute, leaving the original veteran’s entitlement tied up in the loan.
• Our Recommendation: We strongly advise against assuming a VA loan without substituting your entitlement. If you don’t, the selling veteran will lose their entitlement until the loan is refinanced or paid off, impacting their ability to use their VA benefits for future home purchases.
• Equity Gap Payment: If the home’s market value is higher than the remaining loan balance, you may need to pay the difference out of pocket, which could be a significant amount.
• Potential Entitlement Issues: If you assume a loan from a non-veteran, or if the seller doesn’t have their entitlement restored, your own VA entitlement might be tied up in this loan, limiting your ability to use your benefits for future purchases.
• Future Resale Complications: If you later want to sell the home, you might face challenges because potential buyers would need to meet the requirements to assume the VA loan. This could limit your options, and you may need to refinance or find a buyer who can secure new financing.

Interested in a Secondary Loan? Contact Me!

If you’re considering assuming a VA loan and need additional financing, I work with a lender who offers secondary loans specifically for VA loan assumptions. This could be a great way to secure the home you want while managing your financing needs. Contact me directly to learn more and discuss your options.

Learn More

For more detailed information on the VA’s guidelines for loan assumptions and secondary borrowing, check out the official VA circular here.