People are often warned about the dangers of assuming. While failing to get the information you need can be hazardous in any situation, there are times when a different type of assuming can be a smart strategy. Consider this: An assumable mortgage is a home loan that allows both the existing mortgage and its terms to be transferred from the home’s current owner to its buyer. Are VA loans assumable? Could assuming a VA loan be a good way to reach your housing goals?
Are VA Loans Assumable?
Are VA loans assumable? As the U.S. Department of Veterans Affairs makes clear, VA-backed purchase loans offer many benefits. For starters, borrowers who qualify for these loans won’t need to make a down payment as long as the property’s sales price is less than its appraised value. Plus, they will enjoy competitive interest rates, better loan terms, no private mortgage insurance, reduced closing costs, and no penalty fees if they pay the loan off early. In addition, these VA loans are assumable, and that can be a real benefit for both buyers and sellers. Of course, assumable loans also have some downsides. Being aware of the pros and cons can prepare you to make the best choice for your situation.
The Pros of Assuming a VA Loan for Buyers
As Military.com points out, assuming a VA loan can be a great deal for a buyer. VA loans generally come with low interest rates and favorable terms, so it can be hard to find a better deal on a loan. Plus, if interest rates do dip to usual lows, homeowners often refinance to take advantage of it. As a result, established loans often have relatively low interest rates. In the right situation, assuming a loan can be a great bargain for a homebuyer.
The Pros of Assuming a VA Loan for Sellers
As NerdWallet indicates, having an assumable mortgage can be a great selling point when buyers recognize the possibilities that it presents. However, it’s worth noting that the difference between your loan’s interest rate and current interest rates is a major factor. The bigger this difference is, the more power you’ll have. If a borrower can easily get the same interest rate for a new loan, then assuming your VA loan is less attractive. However, if its rates are notably lower or their credit isn’t as good, then the chance to take over your loan is incredibly appealing. When incorporated into the marketing of a home, having an assumable loan can make it easier to sell your home and be used as a negotiating point when you’re settling on a final price.
The Cons of Assuming a VA Loan for Buyers
While the VA does have to approve before a VA loan can be assumed, the borrower doesn’t have to be a veteran. Why might people decide against assuming a VA loan? As Military.com reports, there’s a serious downside to assuming a loan: the down payment. After all, housing prices tend to rise over time, so a mortgage taken out years ago may no longer cover the full cost of the home. That means the buyer may have to come up with a hefty down payment to cover the difference in order to assume the mortgage.
The Cons of Assuming a VA Loan for Sellers
Buyers aren’t the only ones who make think twice about agreeing to a VA loan assumption. As NerdWallet explains, there are some potential drawbacks for sellers regarding their VA entitlement. If they sell to someone who has their own VA entitlement, the buyer can substitute their entitlement for the seller’s, and the seller is free to walk away with their VA entitlement intact. That means they can use it to get another VA loan in the future. However, if they sell to someone who isn’t eligible for a VA loan or lacks sufficient entitlement, then the seller’s entitlement will remain tied to the assumed loan. They won’t be able to use it or apply to have it restored until the loan is paid off.
Would you like to learn more about VA loans? Are you wondering if there are other assumable loans out there? Turn to the loan experts at PrimeLending Kansas City. When you have questions about home loans, we have answers. Contact us today to learn more about our services.