As a seller that has an existing VA (Veteran’s Administration) home loan on your property, you may wonder about the feasibility and possibility of having a buyer purchase the home and assume the current VA home loan. Before you rush out and sign a contract, there are several considerations that you need to take into account.
You may sell the property to a veteran or a non-veteran at any time. However, if the VA home loan was closed after March 1, 1988, and it will be assumed by the buyer, the qualifications of the assumer must be reviewed and approved by the lender or VA. Prior to March 1, 1988, VA home loans could be assumed by anyone and the Veterans Administration didn’t require release of liability. These were called “simple assumptions”. Since these loans are over 20 years old, I’ll focus on the current rules.
The buyer doesn’t have to be a veteran to assume a VA loan. If a non-veteran assumes the loan, the veteran’s entitlement will remain with the loan until it’s paid off. This means that the veteran may not have enough entitlement remaining to purchase another home without down payment. Other programs would still be available, so this may or may not be an issue.
If a qualified veteran assumes the loan, he or she can choose to substitute their entitlement if they have enough remaining. This would restore the entitlement of the seller and the seller could then use it for a future loan. If the buyer chooses not to substitute entitlement or doesn’t have sufficient entitlement available, they can still assume the loan, but the seller won’t have the entitlement restored. In all cases the borrower must meet the credit and income criteria established by the veterans administration.
It is not recommended to allow a non-qualifying buyer to “assume” your mortgage by making the payments for you. In this type of transaction, the buyer pays the seller the difference between the sales price and the remaining mortgage (also known as the Cash-to-Mortgage) and pays the title/escrow company which in turn pays the lender for the seller. Though many sellers are duped into believing that they are released from any potential liability, the reality is they are putting their credit history in the control of someone who does not qualify for a loan AND gives title of the property over to this person thus putting themselves into a position of maximum risk with no collateral should the buyer default on payments. In the end, you could be the one that owes the government for a loss, have your credit history destroyed by someone else, possibly be sued for liability while the buyer only looses his or her initial down payment to you.