When a military veteran is selling a house, sometimes it makes sense to transfer the current mortgage and payments to the new owner rather than applying for a new loan and starting from scratch. Applying for a new loan would mean paying closing costs and locking in a new (not always lower) interest rate. These transferrable loans are called assumable loans, but they come with their fair share of prerequisites.
In most circumstances, a mortgage can’t be transferred from one borrower to another. That’s because most lenders and loan types don’t allow another borrower to take over payment of an existing mortgage. However, VA loans may be transferred as long as they are assumable. VA loans are approved for veterans, currently serving military members, and surviving spouses who qualify for the benefit.
There are certain feats the new borrower must meet in order to qualify for the assumable mortgage. Most often, the borrower assuming the VA loan must also be a veteran or VA loan eligible. The lender will also look at credit scores and debt-to-income ratios to evaluate their ability to repay the loan. The process is the same as if the borrower were to apply for a brand new loan – this includes completing applications, verifying income and assets, and paying a fee.
For a VA mortgage assumption to take place, the following conditions must be met:
- The existing loan must be current. If not, any past due amounts must be paid at or before closing
- The buyer must qualify based on VA credit and income standards
- The buyer must assume all mortgage obligations, including repayment to the VA if the loan goes into default.
- The original owner or new owner must pay a funding fee of 0.5 percent of the existing principal loan balance
- A processing fee must be paid in advance, including a reasonable estimate for the cost of the credit report
Unfortunately, assumable mortgages are not widely available so it’s important to check with a mortgage lender first. VA Loans are usually assumable, but other conventional loans are rarely assumable. Some lenders use a due-on-sale clause where the borrower must pay off the loan in full when transferring homeownership.
Even if a mortgage has a due-on-sale clause and isn’t assumable, there are certain circumstances under which the lender may approve a transfer. These include:
- Death of a spouse, joint tenant or relative
- Transfers between family members, including the borrower’s spouse or children
- Divorce or separation agreements in which an ex-spouse continues to live in the home
- Living trust arrangements in which the borrower is a beneficiary
If you have any questions about assumable loans, whether you want to know if you qualify or are simply curious, give us a call at (760) 930-0569 and one of our loan officers will assist you.