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Warning for Veterans on VA Assumptions
by Michael W. Licamele III
n a letter to program participants this past January, the New England Regional Office of the Department of Veterans Affairs urged lenders and real estate brokers to to counsel veterans and service personnel on the importance of obtaining release approvals from the VA before closing on the sales of their homes securing VA guaranteed or insured loans.
Manchester, New Hampshire - Veterans who sell their homes by allowing the purchaser to assume their loan must be extremely careful to follow proper procedures to avoid potential problems later.
Under the governing law, a veteran who obtains from a private lender a loan which is guaranteed or insured by the Department of Veterans Affairs (a VA loan), is legally obligated to indemnify the United States Government for the net amount of any guaranty or insurance claim the VA may thereafter by required to pay to the lender. However, current law and regulations provide for the release of a veteran from liability to the Government when the veteran sells the property by letting the new buyer assume the VA loan. If the loan is current, the purchaser-transferee is acceptable to the VA from an income and credit standpoint, the purchaser-transferee assumes the loan and also assumes the above-mentioned indemnity obligation, then the veteran can be released from any future liability if the new buyer were to default on the loan.
Pursuant to Public Law 100-198, veterans who obtained their home loans under commitments dated March 1, 1988 and later must go through release of liability processing. Failure to do so may result in the immediate foreclosure of the loan, even if there is no delinquency in the required monthly installment payments. This regulation bears repeating: a veteran continues to be responsible for their loan until they obtain a release of liability, even if they sell their home.
It is extremely important that veterans with VA loans prior to March 1, 1988 who find it necessary or expedient to sell their homes without their VA guaranteed or insured loans being paid in full (i.e. they let the buyer assume their loan), avail themselves of this opportunity to be released by the VA. Those who have not done so have frequently found themselves obligated for the repayment of sizable amounts in the many cases in which their purchasers, or subsequent owners, have defaulted.
Veterans need to remember that when a buyer assumes their VA loan, that buyer could sell the property the next day and let the second buyer assume the loan from the first buyer. So no matter how qualified and willing the veteran's buyer may seem, that buyer might not be the buyer who ends up defaulting on the loan. Obtaining a release of liability eliminates problems from future sales and transfers.
While obtaining a release of liability prevents the VA, the federal government or the mortgage lender from suing the veteran if the buyer who assumes the mortgage defaults, the release does not allow the veteran to reuse his or her veteran housing benefit until that loan is paid off. The only exception to this rule is if the veteran sells the home to another veteran who also has an unused eligible housing benefit and the buyer occupies the home as a primary residence. The veteran selling his or her home must execute with the buyer a Substitution of Entitlement in order to restore the original housing benefit.
Veterans planning to purchase another home with their veteran housing benefit would be wise to consider not allowing a purchaser to assume their loan unless the buyer is also a veteran and is willing to substitute their benefit. This procedure is especially important for any veterans with loans committed prior to March 1, 1988 because these loans do not require a release of liability by the VA. A veteran with a loan closed before this date can simply sign over the deed to any potential buyer. In a rush to sell, the veteran may not realize that letting the buyer assume the existing loan prevents the veteran from reusing his or her housing benefit.
The VA housing benefit can be extremely valuable to veterans and current service personnel. Any veteran considering the sale of his or her home would be wise to obtain counseling from a VA lender and consult with an attorney familiar with VA benefits.