VA loan assumption is a term that is quite unfamiliar to many people. Mortgage assumption is a purchase where the buyer takes over liability of a given mortgage loan from the seller. An assumption is common among people who desire to get out of liability.
VA Loan Assumption
With a normal transaction, the seller can sell off every liability associated with a mortgage loan. By the end of the deal, the buyer repays his or her mortgage in full. The seller then gets a new mortgage from a lender. Upon sale, the seller also has the option to restore the VA entitlement. However, with a VA assumption, the buyer takes over all the liabilities associated with the loan. The buyer continues to make all the payments as per the original agreement with the lender. For the assumption to take place, the lender must approve the deal.
Transfer of liability
In a VA assumption, the buyer does not obtain a new mortgage, but he or she continues with the mortgage obtained from the seller. Though there is transfer of ownership, the mortgage is still the same, and the buyer is answerable for any loan defaults. The buyer can only be off the hook if the seller issues a written release of liability. Furthermore, the seller‘s VA entitlement could still be linked together with the sold mortgage.
Benefits of VA assumptions
VA assumptions are beneficial if the following conditions exist;
- When the interest rate of the mortgage sold is lower than the current rates in the market. The buyer will continue to pay using the initial rates.
- If there are settlement charges, the two parties can avoid them.
- The buyer has the chance to pay cash for any variation between the sales in the agreement and the current mortgage balance. This is a better option compared to taking a second mortgage, which might be at a higher rate.
VA Entitlement after Assumption
Most people wonder whether they can still use their VA entitlement after an assumption. This is possible as long as the buyer is willing to substitute his or her entitlement with the mortgage. This way, the seller’s entitlement can be free for another use. In case the entitlement is still linked with the VA assumption, the seller can contact a VA mortgage professional to help calculate and determine the entitlement that is remaining.
Should You Consider a VA assumption?
Though it can be convenient and cheap, it is sometimes risky. If a seller leaves an entitlement with the new buyer, his or her eligibility can be affected when a buyer makes poor decisions regarding the property. Also, when a buyer loses the property due to bankruptcy of foreclosure, the seller’s eligibility is affected. In case of a foreclosure, the VA will guarantee part of the loan. The VA will be at a loss whenever the mortgage forecloses. In order to restore the entitlement, the seller has to pay all the VA losses in full. Therefore, you should take time and weigh your options before you consider VA assumption.