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In the ever-evolving real estate landscape, buyers and sellers alike are looking for an edge. Enter the concept of assumable mortgages, where a prospective homeowner can take over a seller’s existing mortgage. VA mortgages are one type of loan that is assumable, which offers potential buyers financial flexibility and serves as a valuable bargaining chip for sellers.
This article explores the reasons why someone might be keen to embrace an assumable mortgage, like a VA mortgage. It’s time to get a clear understanding of the process and uncover the answers to critical questions you have.
Understanding Assumable Mortgages
An assumable mortgage is a lesser-known, yet potentially powerful, financing option for home buyers. It allows you to take over a seller’s existing mortgage, effectively stepping into their shoes as the borrower. That means you can inherit the terms of an existing loan such as interest rates, monthly payments, and any remaining balance on the mortgage.
This can be a game-changer in today’s market conditions where interest rates are higher than recent memory. In the right conditions, it could save you hundreds of dollars a month or thousands of dollars over the term of your mortgage.
Here’s everything you need to know about assumable mortgages
How Assumable Mortgages Work
A key component of any home purchase is understanding the financing. When assuming a mortgage, there are certain variables that you need to take into account:
- List price (sale price). You’ll want to ensure that you are able to afford the monthly payments at a given price point and interest rate before going any further in the process.
- Outstanding mortgage balance. This is the remainder of the loan amount.
- Seller equity. Using the purchase price and outstanding mortgage balance, you can determine how much equity the seller has. To find this, simply subtract the list price from the outstanding balance. This is the amount you will need to come to closing with in order to assume the loan.
- Down payment. Equal to the amount of equity a seller has in the property. You will need to come to the closing table with cash or combine this with a second mortgage to cover the difference.
You will also want to consider factors such as closing costs, the interest rate, and work with the mortgage lenders to ensure that you meet their criteria.
Learn more about how assumable mortgages work
What is a VA Mortgage Loan?
The VA mortgage program started in 1944 as a part of the GI Bill of Rights. This was aimed at providing support and benefits to veterans returning from World War II. It was created to facilitate homeownership for veterans by guaranteeing a portion of their home loans, reducing the risk for lenders and making it easier for those with military service to secure financing.
With this as context, the bottom line is that this mortgage comes with many benefits.
VA Loan Assumption: Are VA Mortgages Assumable?
Yes, VA (Veterans Affairs) mortgages are assumable. As a general rule of thumb, conventional loans are non-assumable whereas government-backed mortgages can be assumed. Here are a few other examples of assumable mortgages:
- FHA (Federal Housing Administration). FHA loans, insured by the Federal Housing Administration, are assumable with lender approval. The approval process will likely require a credit score check, financial review, and along with other criteria.
- USDA (United States Department of Agriculture). USDA loans promote home ownership in rural areas. These are similar to an FHA loan in terms of lender approval for assumability.
Find Resources at the Department of Veterans Affairs
Eligibility: Who can Assume a VA Mortgage?
Qualifying for a VA loan may feel like a major hurdle, especially if you have no prior military service.
Luckily, the scope of who can assume this loan is quite wide. Perhaps the greatest advantage of a VA mortgage is that both veterans and non-veterans may be eligible to assume this type of loan.
For veterans, assuming a VA mortgage can also allow them to restore their entitlement and use it for a future home purchase. As for non-service-member buyers, assuming an existing VA loan allows them to access these benefits without having served in the military.
With an expanded pool of buyers, sellers are able to use this as a key differentiation point. Meanwhile, prospective buyers can reap the benefits of this advantageous program.
Major Benefits of Assuming a VA Mortgage
Since these loan terms were intended to give veterans a leg up, they come with great advantages over a new mortgage. This makes VA mortgages a powerful bargaining tool for sellers and highly lucrative to those looking to assume this type of loan.
No PMI
PMI or Private Mortgage Insurance is typically used to protect the lender against default for loans of under 20% of the home’s value. It is an added expense to the borrower, which increases the monthly mortgage payment. VA mortgages are an exception to this practice, meaning you may save even more by assuming this type of loan.
Low interest rates
Generally speaking, these mortgages come with lower interest rates relative to other options. You can assume a loan from a time when interest rates were lower than they are now. Even with the VA funding fee of 0.5% of the remaining loan balance, you are likely going to save tens of thousands of dollars over the life of the loan.
Understanding Entitlement
VA loan entitlement is a key concept in the VA mortgage program. It represents the amount of the loan that the VA guarantees for a veteran. Think of it as operating similar to insurance or additional protection for veterans. For the purposes of assuming a VA mortgage, there are a few things you need to know.
- Loan limit. Veterans are typically entitled to a specific loan limit, which varies by location and can change over time based on housing market conditions.
- Selling your house with a VA mortgage. If a veteran sells a home with a VA loan and the loan is paid off, their entitlement is restored. This means they can potentially use their VA loan benefit again for a new home purchase.
- Entitlement use in assumption. When a qualified buyer assumes a VA mortgage from a veteran or active-duty service member, the seller’s remaining entitlement is tied to the assumed loan until the buyer pays off or refinances the loan. The veteran seller’s entitlement will be partially restored, allowing them to potentially use their VA benefit for a new home purchase.
Find an Assumable VA Mortgage Near You
There are many clear benefits to having a VA mortgage. However, finding this on your own is much like looking for a needle in a haystack.
As a seller with a VA mortgage, how do you know where to advertise your home to the right target audience? If you’re a buyer, where do you even begin to look for this very specific type of property?
Roam was designed to promote affordable home ownership. Our platform is designed to connect buyers and sellers looking for assumable mortgages. We want to take the hassle out of the entire process, so you can focus on finding the right home for you.
Ready to find a home with a VA Mortgage?
Time to Assume a VA Home Loan
VA mortgages offer tremendous upside for those who want to assume a loan with favorable terms. After all, who wouldn’t want a mortgage with competitive interest rates and no PMI?
As you explore your options, it’s important to understand the nuances that come at each juncture of the mortgage assumption process. We’re here to help you every step of the way.
