New Rules from the Department of Veterans Affairs Ease Costs of Assuming a Loan
For many veterans and service members, assuming an existing VA loan can be an attractive path to homeownership. However, a common hurdle in this process is the “cash gap” – the difference between the original mortgage balance and the current home value.
Fortunately, the Department of Veterans Affairs (VA) now allows secondary financing to help bridge this gap, making VA loan assumptions more accessible. But what does that mean for you? Let the professional at Assumption Solutions break it down in our blog.
The Key to Understanding the Cash Gap
When assuming a VA loan, the buyer takes over the existing mortgage balance. However, if the home’s value has increased since the original purchase, there’s often a difference between the loan balance and the home’s current price. This difference is the cash gap, which buyers traditionally had to cover out-of-pocket.
An easy way to understand is to imagine a $50 piggy bank (original mortgage) and a toy castle that now costs $75 (current house value). The $25 difference is the “cash gap.” Previously, buyers had to cover this gap themselves, like a savings allowance for the castle.
Now, “secondary financing” helps bridge this gap. It’s like getting a small loan from your parents for the extra $25, making it easier to buy the castle without waiting to save up. This new approach helps people buy homes that have increased in value since their original purchase.
Enter Secondary Financing for VA Assumable Mortgage Loans
As of August 2024, the VA now permits assumers to obtain secondary financing to cover this cash gap. This means buyers can take out a second loan to supplement the assumed VA loan, making it easier to purchase homes that have appreciated in value.
That’s great news if you’re looking for a VA assumable mortgage! We’re here to help you make sense of the new secondary financing requirements. By breaking it all down into language, you can understand it.
Key Points to Make Sense of Secondary Financing
You’ll want to know these key points before starting your assumable mortgage process. We’ve simplified the VA requirements so anyone can comprehend them more clearly. Here are the basics:
First in Line: The VA loan must always be the most important loan on the house. Any extra borrowing has to come second.
Paperwork: The company handling the VA loan needs to write down who’s giving the extra money, how much it is, and how it’ll be paid back.
What the Extra Money Can Be Used For: The extra borrowed money can only be used for costs related to taking over the loan or paying the seller.
No Cash in Hand: The person taking over the loan can’t get any of this extra borrowed money as cash to spend however they want.
Checking if They Can Afford It: When deciding if someone can take over the loan, the monthly payment for this extra borrowing needs to be considered in their overall expenses.
A Few More Things to Keep in Mind, Too
- The interest rate on the extra borrowing might be higher than the VA loan rate, and it’s up to the borrower and lender to agree on it.
- If the extra loan can’t be passed on to someone else later, the new borrower should be told about this, as it might make selling the house harder in the future.
- The extra loan should give the borrower some time to make payments before charging late fees or trying to take the house.
In simple terms, these rules are meant to protect the VA loan’s importance while still allowing people to borrow extra money when taking over a VA loan. The main goal is to make sure everything is fair and clear for everyone involved.
Get Your VA Assumable Mortgage Moving with New Secondary Financing
If you’re considering taking over someone else’s VA home loan or “assuming” the loan, you might find yourself in a situation where you need a little extra money to make it happen. This is where secondary financing comes in. It’s like getting a second, smaller loan on top of the primary VA loan you’re taking over. While it sounds complicated, secondary financing can make it easier for you to assume a VA loan and become a homeowner. Let’s look at some of the benefits this option can offer you.
Makes Your Home a Reality: Secondary financing can help bridge the gap if you don’t have enough money saved up to cover all the costs of taking over the loan. This means more people can become homeowners through VA loan assumptions.
Reduces Your Upfront Costs: You won’t need to save as much money beforehand. Instead of needing a large sum for a down payment, you can borrow some of that money through secondary financing.
Offers You More Flexibility: The extra money from secondary financing can be used for various expenses related to assuming the loan. This might include closing costs or other fees that come up during the process.
Remember, while secondary financing can be helpful, it’s important to understand that you’ll be taking on additional debt. Make sure to consider your overall financial situation and ability to repay both loans before deciding if this option is right for you.
Who Qualifies for VA Assumption Secondary Financing?
Secondary financing is available to all VA loan assumers, regardless of whether they’re veterans. However, standard VA loan assumption requirements still apply, including credit and income qualifications. (Learn more about qualifying with VA insight.)
While secondary financing can be a valuable tool, assumers should be aware of these three considerations:
- Assumability: If the secondary loan isn’t assumable, it may restrict future sale options.
- Grace Period: Look for secondary loans that offer a reasonable grace period before late charges or foreclosure proceedings.
- Total Debt: Remember that you’ll be responsible for payments on both the assumed VA loan and the secondary financing.
Secondary financing represents a significant opportunity for veterans and service members looking to assume VA loans. By bridging the cash gap, it makes homeownership more attainable and opens up a wider range of properties to potential buyers. If you’re considering assuming a VA loan, exploring secondary financing options could be the key to making your homeownership dreams a reality.
At Assumption Solutions, we’re here to guide you through the VA loan assumption process, including helping you navigate secondary financing options. Contact us today to learn more about how we can help you on your path to homeownership.
