Understanding Secondary Borrowing When Assuming a VA Loan

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VA Assumes You Don’t Have Cash

Understanding Secondary Borrowing When Assuming a VA Loan

Did you know that any buyer can assume a VA loan, not just veterans?

This can be an attractive option for buyers looking to take advantage of favorable loan terms. However, it’s important for Veteran sellers to know that allowing a non-Veteran to assume their VA loan can tie up their VA home loan benefit, making it unavailable for future use until that loan is paid off.

If a Veteran buyer assumes the loan, they can substitute their own VA entitlement, freeing up the original Veteran’s benefit.

Assuming a mortgage can be a great way to take over an existing home loan, especially if it has a lower interest rate than what's currently available. But what happens if you need additional funds to make the purchase?

That’s where secondary borrowing comes in, and if you’re considering assuming a VA-guaranteed loan, it’s important to understand how this works.

What is a VA Loan Assumption?

A VA loan assumption allows you to take over someone else’s VA home loan. This means you step into their shoes, taking on their existing mortgage terms—interest rate, balance, and all. This can be a huge win if the original loan has better terms than what you could get today.

What is Secondary Borrowing?

Sometimes, the price of the home is more than what’s left on the original VA loan.

For example, if the home costs $800,000, but the current VA loan balance is only $650,000, you’ll need an extra $150,000 to cover the difference.

As of August 11th, 2024 you can now use second mortgage financing to cover this delta!

Source - VA Circular 26-24-17

Key Things to Know

1. Lien Position Matters

   • The VA loan must always be the first lien on the property. This means if there’s any secondary borrowing, it must be in a junior lien position. This is crucial because it protects the VA loan’s priority if the home is sold or foreclosed.

2. Documentation is Key

   • The details of your secondary loan—like who the lender is, the loan amount, and how you’ll repay it—must be documented and included in your VA loan file.

3. Use of Funds

   • You can use the money from the secondary loan to cover closing costs or to pay the seller, but you can’t receive cash back from this loan.

4. Impact on Loan Approval

   • Your secondary loan’s monthly payment will be factored into your debt calculations when the current loan servicer reviews your loan. This could affect whether you’re approved.

5. Interest Rates and Future Sales

   • The interest rate on your secondary loan can be higher than the VA loan rate. Also, if the secondary loan isn’t assumable, selling the property later on could be more challenging.

6. Grace Period

   • The secondary loan should include a reasonable grace period before any late fees or foreclosure actions can start.

Example Scenario

Let’s say you’re a Veteran named Chesty, and you want to buy a home from Dan, who has a VA loan with a 2% interest rate. That’s a great deal, so you decide to assume Chesty’s loan. But the home costs $800,000, and Chesty only owes $650,000 on the loan. To cover the extra $150,000, you take out a secondary loan.

• Chesty’s original VA loan stays as the first lien.

• Your secondary loan becomes the second lien.

Later, if you want to sell the house and have a new buyer assume your loans, they’ll need to manage both the VA loan and the secondary loan, which could be tricky if the second loan isn’t assumable.

📢 Bottom Line

Secondary borrowing when assuming a VA loan can help you bridge the gap between the loan balance and the purchase price, but it comes with specific rules and considerations. Understanding these will help you make an informed decision and protect your financial future.