VA-Assumable Mortgages: Another Financing Option for Homebuyers
While conventional mortgage loans generally aren't assumable, VA mortgages guaranteed by the U.S. Department of Veterans Affairs are assumable. If you are an active-duty servicemember, a veteran, or the surviving spouse of a veteran, assuming an existing VA mortgage may be to your advantage, providing you have a Certificate of Eligibility (COE) showing the lender that you are eligible for a VA home loan. Still, it's important to understand how an assumable mortgage works before deciding if getting one is the right choice for you.
What is an assumable mortgage?
If you are interested in buying a home for sale that the seller financed with a VA home loan, assuming the seller's mortgage instead of applying for a new mortgage may be an option to consider. An assumable mortgage allows you to assume the terms of the seller's mortgage, including the interest rate, length of repayment period, and outstanding current principal balance on the loan.
When can you benefit from assuming a VA mortgage?
A major advantage of an assumable mortgage is the benefit of paying a lower rate of interest on the loan. Going with an assumable mortgage rather than a new mortgage can be a practical option when current interest rates are higher than the rate the seller is paying.
Assuming a mortgage can involve fewer closing costs as well. For instance, since many lenders don't require a new appraisal when assuming a VA home loan, you can save money and cut the time it takes to close. But you still have the choice of hiring an appraiser on your own to find out how much the home is worth, particularly when calculating how much of a down payment you will need.
What other key factors are associated with an assumable mortgage?
Even though VA home loans are assumable, you must have the lender's approval for VA loans that closed after March 1, 1988. Like any other mortgage loan, you must apply for the loan and meet all the VA and lender credit requirements to qualify. You also must go through the seller's lender.
The down payment is another key factor that comes into play. How much equity the seller has in the home influences the size of the down payment you must make. If the seller has owned the home for a while and built up a substantial amount of equity, you may need to make a sizable down payment.
Market Value of the Home
You also may need to come to the closing table with more cash if the current market value of the home is more than the amount remaining on the loan principal. In this case, you must be able to pay the difference between the home's sale price and the balance still owed on the original mortgage loan.
Therefore, when determining whether assuming the mortgage can benefit you, it's important to take into account the home's current value and amount of loan principal the seller already has paid down on the existing mortgage loan. Assuming the loan may be to your advantage if you like the loan terms and the home hasn't yet appreciated much in value or the remaining principal due on the loan is still high—factors which mean that less money will be coming out of your pocket at closing.
For more information, talk to a company like Texas Veterans Home Loans.