Answer: When a loan is assumable, it means that another buyer can step into the terms of an existing home loan. This can be a huge financial win for a buyer who is able to assume a home loan that was initially written when interest rates were very low, such as the early days of the pandemic in 2020 when mortgage rates were commonly under 3% APR. Let's compare what this might look like compared to a rate of 7% APR.
Loan Amount: $375,000
OPTION 1:
-- Monthly Principal & Interest Payment on a 30-Year Fixed Rate at 7% APR: $2,494
-- Total Paid Over 30 Years: $897,840
OPTION 2:
-- Monthly Principal & Interest Payment on a 30-Year Fixed Rate at an assumable 2.875% APR: $1,555
-- Total Paid Over 30 Years: $559,800
The benefit of the assumable home loan seems pretty obvious, on both the monthly and 30-year term levels. Everyone has to make their own choice, but it seems pretty obvious that the assumable loan can be a tremendous financial win.
Question: Is a VA home loan assumable only by another veteran?
Answer: No. Anyone deemed creditworthy is able to assume a VA home loan. However, if the owner assuming the loan does not carry their own VA home loan entitlement, the seller will essentially lend their entitlement as the VA entitlement remains with the home and not the seller.
In most cases, the seller will want to take their VA home loan entitlement with them for the purchase of a new property and thus, a seller is likely to give priority to a VA home loan entitled buyer over a buyer without.
Question: Is the funding fee impacted?
Answer: The reduced funding fee that accompanies an assumable VA loan is another financial benefit. VA funding fees, which is the amount a buyer pays as a one-time cost to establish a loan, ranges from 1.25-3.3%. When a VA loan is assumed, the rate is reduced to only .5%. On a $375,000 property, the up-front savings range from $2,812.50-$10,500.
Question: The benefits to a buyer are pretty obvious, but how does the seller benefit?
Answer: The seller benefits by possibly being able to command a higher selling price. It's typical for home prices to fall when interest rates rise, but a home financed with a VA home loan may better retain value in an economic environment of high interest rates.
Question: How do I find a property with an assumable VA home loan?
Answer: Popular real estate listing sites will typically offer a filter based on keywords. Buyers can enter terms like "assumable" or "VA" to help filter out available properties with assumable loans. Social media or for military specific sites may also be helpful resources. Locations with a high rate of military in their population are going to offer the most choices, but all VA entitled buyers are wise to first seek the listings in this category. In my home state, there are currently only SIX listings on Zillow that filter out with a VA assumable home loan (although one has an incredible rate of 2.25%)! Meanwhile, Texas filters out 257 results with the obvious clusters where you would expect.
Question: Can I pick a more expensive home if I'm able to assume a VA home loan?
Answer: Very likely yes! While it's important to make a home buying decision on what kind of house best suits your needs and to avoid over-purchasing, it can be very nice to get some additional amenities. Presuming that a buyer has a full VA entitlement (part of their entitlement hasn't been surrendered in a short-sale/foreclosure or retained on another property), they can likely afford a more expensive home with a low assumable loan vs. one purchased at market interest rates. See the example below.
Monthly Housing Budget for Principal and Interest: $2,500
30-Year Fixed Mortgage at 7%: Loan amount of $380,000
30-Year Fixed Mortgage at 3.25%: Loan amount of $575,000
There isn't a housing market in the country where the discrepancy in these two price points isn't substantial.
Have questions about your housing budget or planning for a home purchase? Reach out to R&V Personal Finance, LLC for financial consultations provided on an hourly, as-needed basis.