VA loans are among the few loans another person can assume. However, you can’t just transfer a VA loan to someone else. You must go through a process with the lender in order for someone else to assume the loan.
What Does it Mean to Transfer a Loan?
Transferring a loan means you simply transfer it to someone else without them qualifying for the loan. The VA doesn’t permit this. In fact, it’s not permitted under any loan program. Anyone that assumes a loan must qualify for it. We’ll discuss how below.
What Does it Mean to Assume a Loan?
Assuming a loan and transferring it seem like the same concept. They are similar, however, when you assume a loan, you go through a qualification process. The lender that holds the loan must approve the person that wants to take over the loan. It might benefit you to take over where the seller leaves off, but the lender may not agree. Below we will discuss how you qualify for a loan assumption.
Qualifying for a Loan Assumption
Just like the seller qualified for his VA loan, you’ll have to do the same. There is one exception, though. You can be a civilian and assume a VA loan. It doesn’t work to the veteran’s benefit, though. Here’s why:
The veteran used his VA entitlement to take out the VA loan. Each veteran receives enough entitlement to purchase a home worth up to $424,100. Once they use the entitlement, they can’t reuse it. In order for the veteran to buy another home, he would have to pay the original loan off in full. If he lets you assume the loan, his entitlement still remains outstanding. This means he may not be able to obtain another VA loan on his next home.
The exception to the rule is if the veteran had any remaining entitlement. This happens when they don’t use their full entitlement amount. Let’s say he had $100,000 remaining. He could use that amount on another home after letting you assume the loan.
However, you must qualify for the assumption. This means meeting the VA’s eligibility requirements. Generally, this means a credit score of at least 620. It also means a debt ratio no higher than 41% on the back-end. Lastly, you’ll also need enough residual income to cover your daily expenses. The VA has a minimum amount required for each area of the country. They base this amount on the cost of living in your area. If you meet these requirements, the lender may approve you for loan assumption.
How Loan Assumption Works
If you assume a loan, you don’t just take over where the seller left off. The first step is paying the seller the difference between the home’s value and the agreed upon sales price. Here’s an example:
You sign a purchase contract for $200,000. You wish to assume the seller’s loan, which has a $150,000 balance. You then owe the seller $50,000. You’ll also owe any closing costs on the loan.
Once the lender approves you for the loan assumption, you go through a closing. This is the same process you would go through if you took out your own loan. You’ll sign paperwork for the loan, putting it in your name, rather than the seller’s name. At that time, you pay the seller what you owe as well as any closing costs. Once the closing is complete, you have a “new” VA loan and a new home.
How Long it Takes to Assume a Loan
Assuming a loan does take a little while. You have to go through a few more steps than you would if you took out a new loan. First, you must make sure the lender will allow it. They can provide you with their assumption requirements. Usually they must first make sure the loan is eligible for assumption. Loans in default, for example, are not eligible.
Once the lender provides you with the information, you must qualify for the loan. This means proving you have the funds to pay the down payment. You’ll go through the normal underwriting process. Once approved, you go to the closing. Because there are the few extra steps, it could ask a few weeks to the process.
Even though someone can’t transfer a loan to you, assumption is an option. You’ll have to go through the entire process as you would with a regular loan. The good news is, though, that you save on closing costs with an assumption. If this interests you, contact the lender that holds the loan to see if you qualify.