The Basics of Loan Assumption

Loan Assumption

There’s a lot of misunderstanding and confusion surrounding mortgage assumption. The ability to assume a loan is one of the things that make the VA loan program so great, but to take advantage of the benefits of loan assumption you first need to understand what it is. This article will go over what loan assumption is, the benefits of loan assumption, and how to go about either assuming or having your VA loan assumed. All VA loans are assumable, which puts them a notch above conventional loans because while conventional loans can be assumable, it is far from a guarantee.

 

What Loan Assumption Is

Typically, when you sell your home, the buyer goes to a lending institution, applies for a loan, waits to get approval, then pays off your existing mortgage with the proceeds from the loan that he or she was approved for. Because it’s a whole new loan, it will have a different interest rate and terms than the old loan. In many cases, the seller’s loan may have a lower interest rate than is currently available in the market. When this happens, it becomes very advantageous to a borrower to be able to assume a loan – and when you can offer something a borrower is interested in, you can attract more interest in your property. If you’re looking to assume a loan, remember that the purchase price is probably still going to reflect the fair market value of the home (unless you have a relationship with the seller), and you will be expected to pay out-of-pocket for the seller’s equity in the home. For example, if the home’s value is $200,000 and the seller only owes $150,000 on the home, you would most likely need to pay the $50,000 in cash to the borrower as part of the assumption. Sellers have the discretion of deciding whether to require that compensation and how much of it to require, so you’re at their mercy. While you can save a great deal of time, hassle, and money by assuming a loan rather than getting a new one, you may very well be required to put more money down when you assume a loan since the seller probably has more than 20% equity in the home.

 

The Benefits of Loan Assumption

The first and biggest reason people assume loans is to avoid the high-interest rates that may be offered at the time and get the low-interest rate that was offered at the time the seller got their loan. As of the writing of this article, it’s not the best time to assume a loan, since interest rates are still pretty low, but there are more benefits to assumption than just getting a lower interest rate. Assuming a loan cuts out most (if not all) closing costs, is much quicker, easier, and more casual than purchasing a home the ‘normal’ way. Assuming a loan also generally offers more flexibility in terms of negotiating the purchase price. Since the only amount you have to pay above the loan balance is determined by the seller, you have a lot of room to negotiate. No real estate agents, no commissions, and very little lender interaction.

 

Tips on Assuming A LoanVA Loan Tips

First, get approval from the lender. I repeat, get approval from the lender. In case you missed it the first two times, get approval from the lender. If you’re on a VA loan, then your loan is assumable, but the new borrower still has to be credit-worthy and qualified for the loan that was made to you. You can still let someone assume the loan without lender permission, but you will still be liable for the loan balance in the event of default. In other words, if the person who assumes your loan doesn’t make their payments, the lender can (and will) come after you as vigorously as they come after the current borrower, even if this is 10 years from now. If you go through a lender to have your loan assumed, it takes a bit longer and there’s a bit more paperwork involved, but it’s still much easier than the buyer getting their own loan and buying the house the conventional way, and it provides some very important protection for you as the seller. When it comes to dealing with the VA, incomplete or omitted paperwork tends to come back to haunt you for years to come, so it’s best to just make sure that everything is kosher from the get-go.

 

VA Loan Assumptions for a VA-Eligible Parent’s Home

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.

The Basics of VA Loan Assumption

The VA Loan assumption is a kind of gray area. Those who have taken out a VA loan or are familiar with the process have heard that a VA loan can be assumed under certain circumstances, but a lot of the particulars about how the assumption works and how it is carried out are not understood. VA Loan assumptions aren’t all that complicated, they just need a little bit of explaining to be laid out in an understandable way.

 

The “Assumability” of a VA loan is one of the biggest advantages of the VA Loan Guaranty in the first place. In fact, learning of the assumable nature of the VA loan is often what tips the scales for someone trying to determine if a VA loan is right for them. The reason this is such a large advantage is because it allows the new buyer to take over the loan at the established interest rate – instead of the current market rate. While that is true for any loan assumption, not merely VA loans, the VA will do you one better; the VA funding fee on an assumption of an existing loan is a mere .5%, as opposed to the 2.1-3.3% funding fee for the opening of a new VA loan. VA Loan assumptions also have a tendency to be in the right place at the right time. For a military member arriving at a new station, he or she has good odds that they’ll find another military member trying to sell their home in an area convenient to the base.

 

To take advantage of the VA loan assumption option, it’s important to know how it works. The VA has published clear, specific guidelines for assumptions. The first condition for the assumption is that the new borrower taking over the VA loan must also be VA eligible. It’s designed to work best in a situation where one VA borrower hands off the mortgage to another VA borrower. What is being assumed is the liability of the mortgage; the new borrower takes the liability of the mortgage over from the old borrower. But the condition that the new borrower is also VA eligible is not the only condition. In order for the Release of Liability (ROL) to be approved, three other conditions need to be met.

 

First, the payments on the loan need to have been kept up-to-date or (possibly) just be brought up to date by the time the assumption takes place. Second, the new borrower must have credit good enough to make it a smart risk on the part of the lender. This is important because the new borrower also needs to demonstrate an adequate ability to pay off the loan (make the monthly payments) just like if the new borrower was opening a new loan instead of assuming an old one. Third, the borrower has to put on paper that he or she is willing to assume the liability of the loan to the federal government. This requirement ensures that the new borrower fully understands the obligations that goes with assumption along with the benefits.

 

It is required by law to obtain an ROL for the loan assumption if the original loan was made on or after March 1, 1988. Being 25 years ago, that date means that the great majority of loan assumptions will need to obtain an ROL. Just in case the seller is tempted to engage in some sort of less-than-legal arrangement, the seller should be aware that if he or she does not obtain an ROL from the lender before the loan is assumed by the new buyer, the lender can force the seller to use the “due on sale” clause of the loan instrument. Not a pretty picture. The buyer could even be forced to pay the loan in full immediately or face an equally immediate foreclosure. They don’t joke around with the requirement to obtain an ROL.

 

For a loan that was opened pre-March 1988, an ROL is not required for it to be assumed, but it’s still a smart idea because it protects the seller in case the buyer has issues making payments or defaults on the loan. In this case, the ROL is not acquired through the lender, but directly through the VA. This is because a pre-March 1988 loan is considered freely-assumable. For the VA’s part, this is preferred because the buyer must take over the obligation to indemnify the VA for any losses on the mortgage. For additional protection, the VA will often recommend that the seller also obtain an ROL through the lender.

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