VA loans are home loans guaranteed by the U.S. Department of Veterans Affairs (VA) and available to eligible military personnel, veterans, and in some cases their families. The Veterans Administration does not lend money directly. Instead, it provides security for loans made by approved lenders. This guarantee allows lenders to offer more favorable terms and looser requirements than traditional loans, and also allows the loan to be passed on to the next buyer.
We are currently seeing renewed interest in underwriting VA loans from buyers seeking lower interest rates than are currently available in the market. In fact, I represented a seller involved in such a transaction earlier this year.
Although often a time-consuming and paper-intensive process, assuming the seller’s loan balance, interest rate, and loan term can result in significant savings for the borrower as well as reduce upfront closing fees. Connect.
However, assuming a VA home loan is not without its complexities and potential pitfalls. Here, we take a closer look at the pros and cons of taking on a VA home loan to help you decide if it’s the right choice for you.
Benefits of VA Home Loan Assumptions
lower interest rates. If the seller has a VA loan with a lower interest rate than what’s being offered in the current market, the buyer could make a big profit. Taking advantage of lower interest rates on older VA loans can save you money in the long run on your monthly payments and total interest paid over the life of your loan.
No down payment required. Assuming a VA mortgage typically means that this no-down payment feature can be transferred to the buyer if the lender allows.
There is no private mortgage insurance (PMI).With conventional loans, PMI is added when your down payment is less than 20%. VA loans do not require PMI, so assuming a VA loan allows buyers to avoid this expense and make their monthly payments more affordable.
Other cost savings. Because the mortgage loan is only being transferred from the seller to the buyer, certain fees associated with originating the new loan may not apply.
Expansion of loan limit. Sellers with full VA status (no outstanding VA loans) and who meet other requirements can earn up to $766,550 nationwide (2024 numbers), Washington, D.C., and some counties. You can buy a home with no down payment for up to $1,149,885 in certain high-cost areas, including: Suburbs of Maryland and Northern Virginia.
Disadvantages of VA Home Loan Assumptions
Restrictions on veterans’ rights. Most assumptions are made between the buyer and the seller who are veterans or active duty military, but if the new buyer does not qualify for a VA loan, the seller’s rights remain on the assumed loan until it is paid off or refinanced. It will remain. This limits the seller’s ability to obtain another VA loan in the future, while potentially remaining liable for the original loan balance if the buyer defaults. Therefore, most sellers will only agree to assumptions made by other VA-eligible sellers.
capital gap requirements. When assuming a VA loan, the buyer must pay the difference between the contract price and the loan amount. This is often paid in cash, as many financial institutions do not allow second mortgages with preconditions. For example, a buyer taking out a $550,000 loan on a home with a contract price of $600,000 would require the $50,000 plus applicable closing costs to obtain the loan.
Fees and Other Expenses. Closing costs are generally lower for hypotheticals, but there are fees, such as the VA funding fee of 0.5% of the hypothetical loan amount, which can increase upfront costs.
Qualification process. The seller must request the lender to begin the process in writing. After pre-approval by the lender’s underwriting department, the buyer must demonstrate VA eligibility, if applicable, and submit the necessary loan application and supporting documentation to meet the lender’s credit, income, and debt and income requirements. There is. Depending on the lender, the buyer’s circumstances, and the complexity of the loan, this assumption can take anywhere from 30 days to a year to complete. On average, it takes 60 days to close. The transaction I participated in took 100 days from contract approval to settlement.
Assume that a VA home loan can be a great financial move if the interest rate on the existing loan is lower than the current rate and the buyer has the cash to cover the capital gap. However, it is important to carefully consider eligibility requirements, potential cash requirements upfront, and liability issues. When considering different ways to purchase a home, it’s always wise to consult a lender and possibly a financial advisor.
Valerie M. Blake is a licensed associate broker with RLAH Real Estate/@properties in Washington, DC, Maryland and Virginia. Call or text 202-246-8602 or email us at: dchomequest.comor follow her on Facebook The Realst 8 of Affair.
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