Assuming a VA loan and house hacking a duplex

[Keith Gertiser]

I Am currently looking to purchase my first duplex and plan on house hacking it. The property currently has a VA loan on the property at 4% and significant equity. I plan to substitute my eligibility for theirs, however the question I cannot find is how to make the difference between their loan and the asking price of the home. Any guidance would be a huge help. Thank you in advance.

Keith 

[Erik Browning]

Hi @Keith Gertiser. It appears you are getting creative here and solving a problem for someone while also capitalizing on your ability to walk into a property with a good rate and substantial equity - that's great.

However, it appears you are talking about 2 different things: Assuming a VA loan and purchasing a home. You are mixing these two together, unfortunately.

Yes, you can assume this loan - but what that means is that you "take over" the loan/home from the person that has it right now. It is not a purchase, there is no exchange of funds from you to them (or a lender on your behalf to them), and you are not needing to come up with a difference. You are plainly taking over their loan. Think about it like this: you signed a 12 month lease on an apartment but you have to leave 6 months into that lease. Instead of paying the fee for breaking the lease, you find someone to take over that lease for you to avoid the fee. You are "assuming" the property and the loan, you are not exchanging any funds with them.

No, you do not have to make up the difference between their loan and the asking price. This is considered a "purchase" and not an "assumption." These are 2 different things you are talking about. If you are using those terms interchangeably, I urge you to make sure you and the "seller" are saying the right words so that you are on the same page. There's a good chance you are both talking about 2 different things. 

If you are "purchasing" the property, then yes you will have to pay for the new home at its market value (the asking price). If you are "assuming" the loan, you are taking over the loan where it's at in the current amortization schedule.

**Note 1: If you are indeed "assuming" the loan, you will have to pay a 0.5% funding fee to the servicer that authorized you to take over the loan. See this guideline from the VA: "At loan transfer, the purchaser is required to pay a funding fee to the service are equal to one half of one percent of the loan balance as of the date of transfer."

**Note 2: The loan servicer (the mortgage company that receives payment from the current owner) must still qualify/underwrite you prior to authorizing the assumption. You still have to have a credit profile that shows your ability to repay the loan.

**Note 3: This last note is about yours and the "seller's" entitlements and gives a synopsis on how assumption works. This is so you can read this on your own to understand more about this feature of the VA loan so you can move forward with an educated understanding of what you are both considering doing:

"Properties that are security for VA-guaranteed loans may be disposed or transferred even though the loan are not paid in full. Veterans who dispose or transfer their properties under these conditions remain liable to VA for any loss that may occur as a result of future default and subsequent payment, unless the property is transferred to a creditworthy purchaser who agrees to assume the payment obligation the servicer initially determines the purchaser's creditworthiness

Any purchaser may qualify to assume a VA loan however, for a veteran's entitlement to be restored, a veteran purchaser with sufficient entitlement must complete a substitution of entitlement when the ROL is closed. The veteran's entitlement is not restored unless the veteran purchaser, in addition to assuming the payment obligation, also agrees and is eligible to substitute their entitlement for the veteran sellers entitlement. It is important for the servicer as soon as possible in the assumption process to obtain COEs for both the veteran assumer and veteran seller to determine if there is sufficient entitlement in which to substitute."