The VA Home Loan Program is a benefit program for military veterans. The program offers veterans extremely favorable lending options, including a fully assumable mortgage. An assumable loan is one in which the borrower may sell or transfer the property and the new owner assumes the liability for the original loan.
Benefits of Assumption
The primary benefit of assumption is favorable loan terms. If the note rate of the existing mortgage is less than current mortgage rates, the buyer benefits from the lower rate. In addition, the costs to complete the assumption are negligible. Note that the buyer must either use cash or obtain a second mortgage to pay the difference between the sales price and the loan balance.
The VA must approve the assumption prior to transfer. A transfer without the approval gives the lender the option to declare the loan immediately due in full under the acceleration clause of the mortgage. The purchaser of the property need not be a veteran to gain approval for assumption. The approval grants the veteran the benefit of release of liability of the lien.
Failure to Obtain Approval
If the veteran transfers the property without VA approval, the lender may exercise its option to demand payoff of the loan or initiate foreclosure. The lender must notify the transferor and the transferee of the intended action within 60 days of learning of the transfer and allow the opportunity to apply for “retroactive approval” of the assumption.
How to Transfer
The veteran must obtain approval for the transfer prior to transfer. The loan must be current at the time of the transfer, and the buyer must be creditworthy and agree to the terms of the loan and VA requirements. The lender conducting the approval may charge fees related to the assumption, such as credit report and processing fees. The seller must pay a funding fee, 0.5 percent of the loan balance at this writing. Approval may take up to 45 days.
Unrestricted transfers are an exception to the VA approval requirement. If property transfers due to divorce or death, the veteran can transfer title to the party who remains in the home. This does not automatically release the veteran of the liability for the loan, although parties may wish to obtain a release for legal and credit purposes. Note that loans dated prior to March 1, 1988, also have the option to transfer the property without VA approval, but the veteran is not released of the liability.