Why VA Assumable loans are NOT closing!

A VA loan assumption is a process by which a new borrower takes over the responsibility of an existing VA loan.  While there may be some really good loan rates being showcased as 'assumable' to buyers, they aren't actually getting to the closing table.  Here's why. 

THE SPEED ISSUE

Assuming a VA loan is NOT FAST.  In fact, a mainstream lender quoted recently that the 'average VA assumption take about 60 days'!  That's BRUTAL, and it's one reason why Sellers aren't about chancing taking a home off the market just to twiddle their thumbs for 60 days. You will see below that many VA assumptions are dying at the last minute putting Buyers and Sellers in a pickle.  The big issue is that Sellers have no contingencies that protect them with a VA loan assumption.  It's just wait and see game... and that's NOT GOOD for Sellers in this market.   

The ENTITLEMENT AND LIABILITY ISSUE

The intended way a VA loan assumption is to work is when the new borrower is eligible for a VA loan and then qualifies for the loan under the underwriting standards that are in place at the time of the assumption. They then take over the payment of the current loan and 'free up' the entitlement and liability of the current loan holder.  The problem is that VA Buyers make up only 14% of the buyer population. (Data of home purchases from July 2019 to June 2020, according to the National Association of Realtors.)  This means that a non-VA buyer is planning on taking over the existing VA loan. This does 2 things.  First, it continues to use the entitlement of the current VA loan holder. This results in the Seller being more restricted with using their VA benefits for the next house and can definitely hinder them from being able to do 100% financing as normally intended. 

Secondly, there is an issue with liability.  If the new buyer eventually defaults on the VA loan they take over, this is actually counted against the Seller and they would lose that portion of their benefit.  As you can see, this is a bit of a risk to the Seller as well!

THE MONEY ISSUE

Perhaps the golden dagger in all assumption failures is the requirement to bring huge amounts of cash to the closing table.  The Buyer must make up the delta between the loan amount being assumed and the new sales price.  For example, if you were assuming a $400,000 VA loan and agreed to buy the home from the seller at $550,000, you would owe $150,000 in cash plus the assumption fees and closing costs of the lender.  Most people seize up at this 'cash delta' and the deal dies.  And sadly, this fact of having to make up the cash difference is many times not even considered.  I know it sounds crazy, but many buyers and their agents thing that if they assume the loan they can still have their way with the amount of down-payment they want to give.  Unfortunately, that's not how it works.  

And I'm not done.  The Buyer must assume the PAYMENT of the Seller and not just the rate.  This is also widely misunderstood with new buyers thinking they can just get a new 30 Year Fixed loan at that groovy interest rate of the seller.  Nope, you have to pay the same payment which means you are probably looking at a 25 year (OR LESS) term on the mortgage.  This could actually increase the new buyer's payment more than what you could get with just a new 30 Year mortgage at a higher rate. 

THE LENDER ISSUE

Perhaps the biggest roadblock to assuming a VA loan is the Lender.  Not all lenders will do assumptions, period.  So, if the loan is being serviced by one of those lenders, you are out of luck.  The issue I'm seeing is that many Sellers think that just because they have a VA loan that it's automatically assumable. That's not true...  the lender can simply say 'no' and, by the way, they do.  On top of the high number of lenders that won't even do a VA Assumption, according to HMDA data, over 12% of VA loan assumption applications received a denial in Q2 of 2022.  

A General Overview of VA Loan Assumptions

If I haven't scared you off already about VA Assumptions, let's see how they actually could work!  As mentioned, a VA loan assumption is a process by which a new borrower takes over the responsibility of an existing VA loan.  Here is what goes into getting an assumption done.

1. Check to see if the Lender offers VA Assumptions. This is your first step.  It is not uncommon that the current servicer does NOT do VA assumptions. 

2. Have the borrower qualify with the Lender.  The next step is to have the new borrower qualify for the loan under the lender's underwriting guidelines. This will involve a credit check, income verification, and a determination of whether the new borrower can afford the payments on the loan.

3. The Seller must then agree to the assumption.  The current homeowner must agree to the assumption, and must provide the lender with any necessary documentation to release them from the loan.  As mentioned above that's not necessarily as cut and dry as it seems especially if the new buyer is not VA loan eligible.  (see above)

4. The Lender must approve the assumption.  After Seller signs, the lender must then approve the assumption based on all the documents while at the same time the new borrower is being processed for the loan.  This is just like what they would go through with getting new financing, but much HARDER.  Remember, based on the 'money issue' the buyer must qualify with the payment of the current seller with much stricter underwriting guidelines.  

NOTE: All of this, i.e. the Lender and VA approval, can take more than 60 days!

(Are you exhausted yet?)

5. The Assumption is Complete (maybe).  Once all the approvals are obtained, the borrowers are completely exhausted and relieved of over 5000 strands of hair, the loan assumption is now complete and the new borrower will take over the loan payments. 

Congratulations you made it.