VA Loan Assumption and the Novation
There’s a serious issue VA loan holders should be aware of when arranging the sale of their home with a loan assumption deal. There are different types of loan assumption transactions; not all of them release the veteran from financial obligation from the loan, should the new owner default on the VA loan.
Consider what happens to your VA loan eligibility if the person who assumed your VA loan defaults and goes into foreclosure. Even though the VA will acknowledge the situation is not the original borrower’s fault, it is still impossible to get 100% VA loan eligibility restored until the loan or the VA’s loss on the deal has been repaid in full.
In the eyes of the VA, it doesn’t matter that the veteran sold the home and is theoretically no longer obligated under the original note, because the loan was assumed, the original mortgage is still in effect.
Loan assumption is not the same as refinancing, where a new contract is drawn up and signed. If the VA suffers a loss which must be repaid, eligibility will not be restored even when the loan has been assumed by another party (until it is paid).
There is one type of VA loan assumption which does relieve the original borrower from liability for the old loan.
These VA loan assumptions must include a novation, which specifically states the borrower is fully released. Some make the mistake of assuming the novation is part of the contract or agreement under the loan assumption, but a seller should specifically ask the lender if the novation is present.
Never assume you have protection of a novation unless you can read in black and white that you are released from all obligation. If you have difficulty understanding the terms of the document, a lawyer may be able to help. You can also contact your nearest regional VA loan center for assistance.