VA loan assumptions offer the opportunity for a new borrower to take over an existing VA loan, which is often promoted as having appealing interest rates and being "assumable" for buyers. However, these assumptions frequently encounter obstacles that prevent them from reaching the closing stage. Let's explore the reasons behind this.
The Issue of Time
Assuming a VA loan is far from a quick process: According to recent feedback from numerous mainstream lenders, the average duration for a VA assumption is approximately 60 days. This extended timeline can be incredibly discouraging for sellers who are hesitant to take their homes off the market during this waiting period. Consequently, many VA assumptions end up falling through at the eleventh hour, leaving both buyers and sellers in difficult situations.
Entitlement and Liability Concerns
For a VA loan assumption to work seamlessly, it requires that the new borrower is a qualifying veteran and meets eligibility criteria for a VA loan and adheres to current underwriting standards. By assuming the loan, wether active military or a veteran, they would assume responsibility while freeing up the original holder's entitlement and liability. However, there's an important caveat; only 14% of buyers represent VA buyers in the market. In many cases, non VA buyers express interest in assuming such loans while still tying up the original holder's entitlement. Moreover, if the new borrower defaults on payments, there could be potential implications for the seller's VA benefits.
The Financial Aspect
One common misconception revolves around understanding how financial matters play into these assumptions.
Let's say you're considering taking over a $400,000 VA loan for a home that is being sold for $550,000. In such a scenario, you would need to pay the $150,000 difference in cash along with assumption fees and closing costs. It's important to note that the buyer will be responsible not only for the interest rate but also for the seller's payment.
Challenges with Lenders
It's worth mentioning that not all lenders handle VA loan assumptions. If your loan servicer falls into this category, you may face difficulties. Many sellers mistakenly assume that their VA loan is automatically assumable, but lenders often decline such requests. In fact, HMDA data shows that more than 12% of VA loan assumption applications were denied in Q2 of 2022.
Understanding VA Loan Assumptions
If you are still contemplating a VA loan assumption, here is an overview of the process;
Check with Your Lender: Confirm whether your lender offers VA loan assumptions.
Borrower Qualification: The new borrower will need to meet the lender's underwriting criteria, which involves credit and income checks.
Seller Agreement: The current homeowner must provide consent for the assumption and provide any necessary documents requested by the lender.
Lender Approval: Once the seller has given consent, the lender will evaluate and approve or disapprove the assumption request through rigorous underwriting processes that are typically more stringent than those involved in obtaining a new loan.
Please note that the entire process, including lender and VA approval, can often take longer than 60 days.
Finalization (Hopefully): Once all necessary approvals have been obtained, the assumption process is considered complete and the new borrower assumes responsibility for making loan payments.
Building Your Dream into Reality
Homeownership can be achieved, but like any major milestone it requires careful planning, persistence and expert advice. I specialize in active military and veteran mortgage lending, with an eye toward education - my aim is to make your dreams of homeownership in Colorado come true!
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Disclaimer: Fred Gallegos is a licensed loan originator who specializes in Colorado and operates this blog as an individual. Although his aim is to provide accurate and up-to-date information, this should not replace official regulations and guidelines.
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