Transcription
Today, we're going to answer the question: Are VA loans assumable? And if so, how do we do it? We're going to dig into it right now.
We're going to lead off with, I guess, the first thing should be, what is a mortgage assumption? This is actually really cool, 'cause this is creative financing, right? Like, people don't think about it this way, but this is creative financing. So, let's say I bought a house two years ago, used a VA loan, 2.5% interest or whatever. We'll say 3% interest. And now I'm moving across country. And that loan was, we'll just say it was a $200,000 mortgage. And I still owe, I don't know, $190,000 on it. And I'm now moving. And my house is worth $250,000. And I will sell my house for $250. But interest rates are now like 8%. And so I could sell it for $250 and normal interest rates, whatever. And and that's fine. People can buy it. That's great.
Um, and that might just happen. But if a buyer came to me and said, "Hey, I would love if I could take over your $190,000 mortgage that is a 3% interest rate that you're already two years into. So, I'd only have 28 years left on the amortization cycle. Can I do that and I'll pay you $60,000 down?" That's a mortgage assumption, as long as the mortgage company approves it, which with the VA loan, as long as the VA approves it, right? As long as you meet the criteria, which we'll get into. Generally, they're going to, uh, then that's a win-win, right? That's the basis of a mortgage assumption. You're taking over the existing mortgage at the existing rate to avoid that higher interest rate that we're currently seeing. You got to bring some cash to make it work, but that rate is very valuable. Win-win.
Why does this matter? Let's say, for ease of math, I compared a $500,000 note, right? So, a $500,000 mortgage at 3%, 6%, and 8%. So, at 3%, a $500,000 mortgage was $2,118 a month. At 6% interest, that was $2,998. And at 8% interest was $3,669 a month. So, you know, the difference between a 3% and an 8% rate is, uh, significant, right? That's, I mean, that's huge.
The other thing, too, is like with the amortization cycle, right? So, uh, I mean, man, I did a ton of math, so I'm I'm not going to bore you by reading through that whole thing. If you want to see all the math and you want to see how it all breaks out with like picking it up like year two or, you know, two years into the amortization cycle and how much more of your payment goes to principal rather than interest, it's actually really interesting, uh, because of how amortization cycles work. Um, so I kind of did some of that math out. Uh, so go check out the blog post if you want to go way more into detail on all this and see like how much more the, like, it's super cool because like two years into an amortization cycle, you know, on a, it, it depends on your interest rate and, you know, your purchase price and all that, but let's say it was a half a million dollar house and you had a really low interest rate. Like, two years into the amortization cycle, each time you make that monthly payment, you're probably paying two or three or $400 more towards principal than when you originally started paying the loan. So that means that if you take over two years in, the original guy, their or girl, whatever, their first two years of payments weren't as effective towards paying down the note as where you're starting.
If you imagine like you're pushing a flywheel, and you know, you start pushing and it barely moves, and you start pushing and it barely moves, and then as it, as you're trying to push this thing, it slowly starts to spin, and as it spins, it slowly starts to spin faster, and as it gains momentum, it becomes easier to spin, and it finally, and then like you finally get it to start moving, and then you're like, "I'm tired," and you just hand it to someone else, and then now you, the new you, come in and you're like, "Wow, it's moving. This isn't so bad." Now you get to push it all the way through to when it's moving on its own, and then you're like, "Hm, just push this all through to the end." Like, that's kind of what this amortization cycle's like. It's like someone got this freaking thing to start moving, and all you got to do is take it to the finish line. Pretty sweet.
Who can assume the VA loan? Uh, realistically, anybody, as long as you meet the criteria. So, a veteran or or a mil service member can assume it, but also a civilian can assume it, right? So that's a common misconception. Uh, when a VA loan is assumed by another eligible veteran, veteran entitlement typically does not need to be transferred and can simply be exchanged between the buyer and seller. Substitution of entitlements. So, you just have to file a substitution of entitlement with the VA. As long as you do that, boom. I'm like, high five. You get my mortgage. Substitution of entitlements filed. So you're taking my entitlement. Now I can go use VA loan with that same entitlement elsewhere.
Now, if you sell or let a civilian or somebody who did not have entitlement, so if it's a service member who doesn't have remaining entitlement and you let them take over, or a civilian or somebody who does not rate certificate of eligibility, like does not have entitlement for the VA loan, takes over your mortgage on the VA loan at that point, or if you fail to get the substitution of entitlement at that point, you, as the seller, do not regain your entitlement until that mortgage is paid to zero. Whether that's through a refi or a sell sale of the house where they pay off the mortgage, which means that if you were selling the house to move across country and use a VA loan again, you may not be able to, or at least you may have to pay 25% down. Or, you know, if you're selling a $300,000 house, you're moving to another market that's $300,000, you might still be able to, right? Uh, but if you're selling an $800,000 house, well, sorry, your entitlement is tapped. And if you don't get it back by selling to somebody who's qualified and substituting the entitlement, you're screwed, right? So, you need to be aware of that.
You can sell to somebody who's not eligible. So, don't buy into the lie that you can't. It, it can go. This is what's cool. The VA loan can be assumed by somebody who's not eligible for the VA loan. You will lose entitlement. So, you need to be aware of that. That's not necessarily a bad thing. Like, if you weren't planning on using the VA loan again right away, you might be fine with that.
Here are the requirements to assume a loan, right? You have to intend to occupy as your primary residence. We already talked about that. Uh, minimum credit score. There's not a minimum requirement, but most lenders want to see a 620 if they're going to let you assume. Uh, now, there I've seen as low as like 560, 580, but, you know, that's kind of the the norm with the assumptions is like 680. They want to see a little bit higher, I think, for the assumptions. Uh, you've got to have a back-end debt to income ratio of 45% or better. So, basically, got to make enough money for the debt to income to actually support the loan amount. Funding fee, 0.5%. And you got to make a down payment that's equal to the difference. So, if it's a $190,000 remaining mortgage, $250,000 purchase price, you've got to fork the $60,000 difference, right? Somehow, someway.
Criteria. This is the first piece of the puzzle here. So, in order for the VA to even think about approving your mortgage being assumed by a buyer, as the seller, the existing loan must be current. So, or if there was a past due amount, it must be paid in full before the closing. So, you cannot use the proceeds of the closing to make the loan current. You have to make it current before the closing of the property. Uh, the buyer assuming all mortgage obligations, including repaying the VA if they default on the loan. So, the buyer has to be okay with that. The original owner or new owner, uh, must pay a funding fee. So, the new funding fee is 0.5%, which is actually way less than like a funding fee on, uh, any other mortgage, let alone an origination, uh, fee on any other mortgage, let alone, um, the VA. So, like, people are like, "Oh, yeah, but you got to remember the funding fee." Look, if if you get a mortgage of any type, of any product, for any loan, to purchase any property ever, whether it's an investment loan or a conventional loan, FHA, USDA, USDA, a doctor loan, VA loan, I mean, I do not care, unless you are a VA loan with a Purple Heart or 10% disability where it's waived. With the exception of that criteria, there's not a loan out there that I know of where the origination fee or funding fee or whatever else they want to call it is less than 0.5%. So, I don't want to hear it.
Buyer must qualify for the existing mortgage based on credit and income guidelines, which we'll get into. Uh, and a processing fee must be paid in advance for the cost of pulling the buyer's credit fee. But basically, like, you know, the $250, $50 bucks to apply for the mortgage, like process, like check your credit, whatever, normal stuff, right? Nothing crazy.
Couple of tips for how you might find some of these. So, a real estate agent can help you out, right? As always, if you'd like an introduction to a really solid real estate agent in your area, hit me up or click on my website. This button says "Recommended Agents." We've got a solid list. Multiple Listing Service, the MLS, you know, easy. Uh, you can actually, I bet you what's going to happen now is you can probably go in there and search "assumable," that word, and or "assumption," either of those words, uh, and I bet you'll be able to find these mortgages. Uh, print ads. That's a bit archaic, but, you know, maybe they'll be in your newspaper. I don't know. Uh, specialized websites. So, like takelist.com or zumption.com. They're, you know, willing to undergo assumption process. So, take a look at those. I didn't play around with them too much, but I'll tell you right now, if you're not in my Facebook group, you should be. People are throwing them up all over the place right now. Hey, I'm thinking about moving. If you're interested, interested in buying a duplex in this area, I would be willing to let you assume my mortgage. Here's the property. Hit me up. Like, that's happened probably five times this week alone. Uh, I've seen two or three in Virginia. Um, and and yes, you know, you got to have the money for the down, like, or there's other options, but like realistically, people are open to it. They're posting it even just in my Facebook group. So, it, it is becoming more common. Like, I've never seen that up until probably six months ago, but now, in the last month, it's like more, it's picking up, right? Because people are PCSing and they've got great loans and they're willing to say, "Hey, you want my loan?" Like, rather than selling the house to somebody who's going to get stuck with a high interest rate, like, you know, just take over my loan, give me cash, and we'll move on. But jump in my Facebook group. They're popping up all over the place there. Uh, so, you know, post where you're at, and if you're, you know, if you're looking to move and buy somewhere, look, hey, I'm looking to move here. Anybody looking to sell a house that would be willing to assume, you know, have their mortgage assumed.
Some of the stuff that you can probably mess with here is like, let's say you got to come out of pocket $100,000. Like, you're sell, you're buying a $600,000 house. There's a $500,000 note. You can ask the seller to carry the difference. There is nothing that says you can't come in and say, "Hey, I'd like to assume your $500,000 VA loan that's at 2 and a half%. However, I don't have the $100,000 down. So, I'm going to live in the house. I would like to pay you 5% interest on the $100,000 as a seller finance advertised at whatever%. Right?" And maybe because of the way that everything works out, you can even be like, "Look, I'll pay it back over 60 months." Like, major payments on that. You know, you suck it up. I don't know. However, however it works, right? Or 30-year amortization, but I'll balloon payment it out in five years or 10 years. Um, however that works for you. Uh, or maybe you can find someone who does a second position, or, you know, I mean, or you have the cash and you pay it. That stinks, but it's not any different than if you put 20% down on a conventional loan, except you locked in a 2.5% rate instead of the 7, 8, 9% you'd be paying right now. Um, but I think there's actually going to be a point where if prices drop, you're going to be able to buy like almost at loan balance with that great rate.
Okay. Exception. So, here are the exceptions to VA approval. So, according to the VA guidelines, these situations do not require the VA approval in order to execute. So, if the borrower's death and the loan was assumed by a relative. Transfer occurred due to legal separation or divorce. Um, assumption not required transfer of rights, uh, because the owner remained in the beneficiary. Uh, assumption, uh, occurred as a result of spouse or child becoming a joint owner. Uh, it required the creation of subordinate to the lender security instrument not include the transfer of occupancy rights. Security interest in the household appliances for purchase money was created in the assumption. Frozen VA loan. So, potential buyer isn't required to be eligible for the VA loan. Awesome. Funding fee and closing costs are reduced. Awesome. Uh, possibility to take over lower interest rate. Yep. But it's definitely lower than current economy. Uh, whatever veteran assumes the mortgages or the mortgage sellers will be able to regain their full entitlement.
Cons: Seller's credit score could be negatively affected. Uh oh. So, if the buyer defaults on the loan or makes a late payment before the liability is transferred. So, um, you know, the lender will hold the initial buyer responsible for the payment until there's a release of liability, which could take some time depending on the lender. So, you just need to make sure that you push for that release of liability to get done quickly. Um, so that is one downside. If the, if the release of liability is not done and the new borrower defaults or makes late payments, it could tap your credit, but you can get that, you know, resolved down the line. And, uh, ultimately, it shouldn't take that long to get the release of liability done. So, I'm sure there's actually ways to get around that with an attorney or whatever to, you know, cover your ass. Um, seller may have to forfeit their entitlement if the buyer is not eligible. Seller will remain liable for the loan until they relief. Oh, we already touched on that. Release liability. Uh, buyer may have to make a down payment. Yep, covered that. Lenders are not required to approve the assumption. Most will as long as you're qualified. And yeah, depending on your lender, it can be a lengthier process, right? So, you know, if you're talking to big bank lenders, big box lenders, it might, it might suck.
So, here's some frequently asked questions. So, as far as other loans that are assumable, the FHA loan, also assumable, pretty similar to the VA loan. FHA VA loan, fairly similar, similar. Both generally assumable. Both blah blah blah blah blah. Um, the USDA loan also assumable, but, uh, the majority of them, from what I understand, the rate and terms will actually change. So, it's almost like you're assuming the remaining note, but you're going to get new rates and terms. So, it's like a new mortgage with the rema, doesn't seem like an actual assumption. Um, sometimes it'll stay with the same rate and terms. Uh, doesn't seem super advantageous. Uh, conventional seems like it's really rare because of the due-on-sale clause. It seems like they don't really, uh, like you to actually do assumptions.
Looks like I covered it all. Right. So, bottom line is this: VA loan is assumable. VA loan is still, in my opinion, the single best loan product on the market. If an agent or lender, as always, I'm telling you, if an agent or lender is telling you that the VA loan is not competitive, it's because they don't, they're not an expert, right? It's not their fault. I'm licensed as an agent. I'm licensed as a lender. I don't actively do either. I just got licensed because I do referrals, right? I I recommend people and I get a small cut of their commission for making introductions because I have a big network of vetted people that I know and trust and whatever, and I make connections. That's what I do. Um, and so I don't actively do the piece, but that means I work with a ton of people and I'm, uh, basically like an unbiased third party 'cause I get to basically, my my entire revenue source is based on how well these other agents and lenders actually transact, right? It's not based on a bias of how good I am. And so, uh, I see a lot of this and I hear a lot of this, like, "My agent said this," and "My lender said this." And the reality is, like, I can tell you from being licensed in both, they teach you what the VA loan is and they teach you what the FHA loan is. But the information they give you about the VA loan is like zero down, you know, entitlement, who's eligible, it's the basics. They don't teach you anything about the nuances. So, being licensed does not mean that you know jack about how to actually use the VA loan, right? And being licensed and a veteran also doesn't mean that you know jack about using the VA loan, right? So, just keep that in mind. There are tons of really solid agents out there and lenders who are veterans. Not dogging on that. Saying you really need to know that the person you're working with actually did a deep dive in the in the guidelines. And if they are not willing to pick up the phone when you write an offer, call the listing agent, and sell the VA loan and sell you as a buyer to that listing agent, you've got the wrong person. And if they're going to tell you that your offer is less competitive and your VA loan is less competitive for XYZ reason, you've got the wrong professional in your corner. And I'm sorry. I'd be happy to help you out. Not trying to steal you away from professionals, but I just hate to see veterans getting screwed like that because we have helped people all 50 states in the hottest market that this nation's seen in god knows how long buy over $50 million worth of real estate in the last two years with no freaking issue, including like a $1.93 million duplex in Venice Beach, California in 2021 in the freaking height of the craziness. Zero down. Uh, got a guy right now who's about to buy a $2.6 million house in Dallas area. Zero down. Like, there's the VA loans competitive. Like, there's some crazy stories out there that I could tell you.
So, don't mean to ramble. I just figure if you're going to watch this VA assumption video all the way through, like, this is a good point to throw in here and just say, "Look, make sure you're you're covering your ass. Make sure you're taking care of. Make sure you're working with the right people." Have a great freaking day. Make sure you subscribe. Join the Facebook group if you're not in it already because it's amazing. We are the biggest military real estate investing community in the world. Not Facebook group, just actual community. Um, so if you look at all the other platforms, do the math. Have a great day.