VA Loan Assumption: Should You Sell or Assume?
Both a traditional home sale and VA loan assumption have their advantages and disadvantages. Here we take a look at when each option may work best.
Veterans who purchased a home with a VA loan may wish to sell that property eventually.
When selling, Veterans typically have two options:
- Sell to any homebuyer and pay off any remaining mortgage with the proceeds.
- Have the purchaser assume their loan and the payments associated with that loan.
Both options have their advantages and disadvantages. Here we take a look at when each option may work best.
Assuming a VA Loan
In a typical purchase transaction, the buyer is getting a mortgage to purchase the home, and the seller is using the proceeds to repay their loan in full.
The seller transfers the financial obligation solely to the buyer, and the seller can restore their full VA loan entitlement once their VA loan is paid in full.
Unlike a typical purchase, an assumption means the buyer takes over the seller's liability in the mortgage with the current rate and terms.
In markets with raising interest rates, a loan assumption could mean a great deal for the buyer and a tremendous selling feature. However, it could also cause you financial harm or prevent you from using your VA loan benefits in the future.
The Risks
The downside to a VA loan assumption is the risk it poses to the seller.
If the seller fails to obtain a release of liability, any missed payments or the buyer defaulting on the loan could harm their credit. Sellers can obtain a release from the current servicer.
Equally as important, a Veteran could lose all or part of their VA loan entitlement without substitution of entitlement. A substitution of entitlement allows the seller to essentially swap their entitlement with the buyers.
Without substituting entitlement, the seller's entitlement would be attached to the mortgage until it is paid in full. Additionally, if the buyer ever defaulted on the loan, the seller could lose a portion of their entitlement for good.
Traditional home sales are the most common and offer the seller the peace of mind that their entitlement is safe. However, in certain markets, and with the right documentation, a VA loan assumption may benefit both buyer and seller.
