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.