Are VA Loans Assumable?

One great benefit of VA loans is the option for loan assumption. While this feature wasn’t a major factor in recent years due to historically low mortgage rates, today’s higher rates have made it an attractive opportunity. This is because a VA loan assumption allows a homebuyer to take over an existing VA loan, including its interest rate and remaining balance. For VA homeowners, offering an assumable loan can be a powerful selling point. Assumptions generally come with lower fees and fewer closing costs than a traditional home purchase. However, there are important considerations for Veterans allowing their loan to be assumed by a non-Veteran.

Potential VA Loan Assumption Benefits

Lower Interest Rate

For homebuyers, the two biggest benefits of a loan assumption are rooted in cost savings. An assumption means you can take advantage of the low rate a homebuyer locked down months or even years prior, when the housing market looked a lot different.

Nearly 84% of VA homeowners have a mortgage rate below 5%, according to a Veterans United analysis of Ginnie Mae data through October 2024. Securing a lower interest rate can have a huge impact on housing affordability.

For example, on a $400,000 loan with a 7% interest rate, the monthly principal and interest payment comes out to about $2,660. With a 3% rate, that payment drops to $1,686. That's nearly a thousand-dollar difference in monthly housing costs. In today's market, potential buyers can't get a rate anywhere close to that 3-5% range right now.

Low Costs and Fees

The other money-saving benefit of a VA loan assumption is that they come with few costs and fees, especially compared to a traditional purchase loan. Most of the closing costs associated with a VA purchase aren't part of an assumption.

The person assuming the loan does pay a funding fee of 0.5 percent of the loan balance. That fee goes directly to the VA and helps keep the loan program running for future generations of military buyers. Veterans who would typically be exempt from the VA Funding Fee are also exempt from this assumption fee.

Potential VA Loan Assumption Challenges

Now let's take a look at some of the challenges of a VA loan assumption. There's one big one for prospective buyers and one facing VA homeowners.

Cashing Out Homeowner Equity

Buyers don't just waltz in and take over a Veteran's mortgage without paying for the privilege. Homeowners want to make sure they capture whatever equity they've built in the property, otherwise there's no benefit to the seller for allowing the assumption.

For example, let's say the VA homeowner has $350,000 remaining on their loan, and they're selling their home for $450,000. The person assuming the loan would need to pay the homeowner $100,000 at closing in order for an assumption to make sense.

In many cases, loan assumers cover that cost in cash, which can be a challenge for buyers. But it might be possible to obtain secondary financing to pay out the homeowner's equity at closing. Lenders will likely include that debt when they consider a loan assumer's overall debt and income situation.

In either case, potential buyers need to figure out how they'll cash out the homeowner's equity in order to make a VA loan assumption work.

Impacts on VA Loan Entitlement

For VA homeowners, the big consideration with allowing an assumption is their VA loan entitlement. If the person assuming your loan is a Veteran with sufficient VA loan entitlement, then you can ask them to formally substitute their entitlement for yours on that mortgage. Otherwise, the entitlement you utilized to purchase the home will remain tied up there until the loan is fully repaid.

Failing to get a substitution of entitlement can limit your 0% down purchasing power when it comes time to reuse the VA loan benefit. It's also possible you wouldn't have enough entitlement remaining to reuse the benefit at all. VA homeowners also lose that portion of their entitlement entirely if the assumer later experiences a foreclosure or short sale.

Can a non-Veteran buyer assume your VA loan? Yes. But it can affect your future use of the VA loan benefit. For some homeowners, that's a risk worth taking. Others ultimately decide to allow for assumptions only to Veterans substituting entitlement or to pursue a traditional home sale.

Like every mortgage tool, loan assumptions come with both benefits and drawbacks. Be sure to discuss your options thoroughly with your lender and real estate professional to see if it’s the right option for you.