In a VA loan assumption, the buyer takes over the seller’s VA mortgage balance and terms. If the price exceeds that balance, a “cash gap” appears. As of 2024 policy, buyers can legally bridge that gap with secondary financing—provided the second is subordinate, documented, and underwritten. Done right, you can close with minimal cash while protecting future assumability.
Quick Facts
- “Cash gap” = sale price minus assumed VA balance; secondary financing can legally fill it.
- Allowed options: second mortgage/lien, seller carryback note, personal loan, post-close HELOC.
- VA conditions: subordination, full documentation, no cash back, DTI review of the second.
- CLTV must meet second-lender guidelines (often 85–90% maximum combined value).
- Counsel buyers if the second isn’t assumable; it can limit future assumption resale.
Mini-FAQ
Can I use a second mortgage with a VA assumption?
Yes. The second must be subordinate to the assumed VA first, fully documented, and underwritten into your DTI. The second-lender’s CLTV limits apply, and proceeds must go only to allowed costs or seller equity—not cash back to the buyer.
Is a seller carryback allowed to cover the gap?
Yes. The seller can carry a note for the difference. Terms are negotiable, but the carryback must be in second position, disclosed in the file, and included in DTI. Clarify later assumability; some seconds cannot be assumed by future buyers.
Can I use MHA or unsecured funds for the gap?
You can use personal loans, but their payment hits your DTI and rates are usually higher. Education-linked stipends like MHA aren’t stable qualifying income; qualify on durable sources. A post-close HELOC is possible when value and guidelines support it.
Key Takeaways
- VA assumptions can include subordinate financing when all policy conditions are met.
- Second liens and seller carrybacks must sit behind the VA first via subordination.
- Funds may pay seller equity and allowed costs; buyers cannot receive cash back.
- Underwriting includes the second’s payment in DTI and residual income tests.
- CLTV limits often cap seconds near eighty-five to ninety percent combined.
- Non-assumable seconds can restrict future assumption resale; counsel upfront.
Are secondary liens allowed on VA assumptions?
Yes—secondary financing is permitted if the VA-guaranteed first remains in senior position. The second must be subordinate and fully disclosed, with its payment counted in underwriting. Proceeds can only cover seller equity and allowable closing costs, not cash back to the buyer.
- Subordination: The second lender executes a subordination agreement acknowledging the VA first as senior lien at all times.
- Transparency: The assumption package must list the second lender, loan amount, rate, amortization, and payment.
- Use of funds: No cash back to the buyer; funds go to equity payout and allowable costs only.
- Confirm VA servicer acceptance of the assumption and secondary financing before drafting the second.
- Collect the second-lender term sheet early so DTI, payment shock, and CLTV can be tested concurrently.
- Document wire paths to show proceeds flow only to settlement charges and seller equity.
Which secondary options can cover the cash gap?
Four common choices: a second mortgage, seller carryback, personal loan, or post-close HELOC. Each has tradeoffs across rate, speed, and future flexibility. Structure the option that fits CLTV limits, your DTI, and future assumability goals.
- Second mortgage: Underwritten by a bank, credit union, or community lender; predictable documentation and clear CLTV caps.
- Seller carryback: Flexible terms negotiated privately; can ease approvals where traditional seconds are tight or slower.
- Personal loan: Fast, unsecured, but higher interest and shorter terms; payment adds pressure to DTI.
- Post-close HELOC: Bridge with short-term funds, then replace with HELOC after title seasons in your name.
- Model your payment corridor with each option to reveal the most sustainable path.
- Prioritize options that preserve assumability for your own future buyer.
- Keep closing timeline realistic; seller carrybacks can close faster than some institutional seconds.
VA conditions you must satisfy
VA’s core concerns are first-lien priority, safe structure, and borrower ability to repay. That means subordination, no cash-out to the buyer, full file documentation, and inclusive DTI testing. Interest rate on the second is negotiable and may be higher than the assumed rate.
- Subordination & recording order ensure the VA first lien remains senior without exception or side agreements.
- Documentation: Include the second’s note, deed, amortization, and payment schedule in the assumption file.
- Underwriting: The second’s payment counts in back-end DTI and residual income; stress-test taxes, insurance, and HOA.
- Have the closing agent confirm recording sequence and subordination language prior to consummation.
- Re-run DTI with estimated second payments and tax/insurance updates to prevent last-minute findings.
- Confirm “no cash back” compliance on the Closing Disclosure and settlement statements.
How CLTV limits shape your second
Combined LTV typically cannot exceed the second-lender’s policy, often 85–90%. The higher your CLTV, the tougher the pricing and approval terms. Reducing the gap, adding reserves, or choosing a modest carryback can keep CLTV within acceptable limits.
- Market value drives the denominator—get realistic valuations early to avoid re-structuring at closing.
- Some seconds price in tiers at CLTV milestones; small equity contributions can drop you into better pricing.
- CLTV caps are lender policy, not VA caps; shop lenders with flexible but prudent limits.
- Request a written CLTV matrix from the second-lender to plan scenarios confidently.
- Use seller credits for allowable costs to protect the CLTV headroom for the gap itself.
- Revisit property taxes and insurance; high escrows can force a smaller second to keep DTI in range.
Seller carrybacks: flexibility with responsibilities
Carrybacks can be faster and tailored but must follow VA rules and state law. Negotiate rate, term, and amortization that fit DTI and CLTV. Clarify whether the carryback is assumable and how a later sale will be handled.
- Note terms: Fixed rate and fully amortizing payments are cleaner than balloons for DTI and resale.
- Disclosures: Include carryback terms in the contract and settlement documents; keep the file audit-ready.
- Assumability: If the carryback cannot be assumed, notify the buyer that future VA assumption resale may be limited.
- Draft the carryback with local counsel to meet recording and consumer-protection standards.
- Set a payment start date that syncs with first-mortgage due dates to avoid budget surprises.
- Document seller’s lien position and escrow instructions to prevent priority conflicts.
Personal loans and post-close HELOCs
Unsecured loans are quick but increase DTI; HELOCs can be efficient after title seasons. If you must use a personal loan, right-size term and rate to keep payment sustainable. For HELOCs, confirm property value supports the line post-closing.
- Unsecured rates run higher than mortgage seconds; assess payment shock carefully.
- Post-close HELOCs require equity and lender eligibility checks; plan timing and new disclosures.
- All new debt must be included in DTI if opened before underwriting is finalized.
- Ask your underwriter whether a pending HELOC affects clear-to-close; often it’s best to open after funding.
- Maintain reserves; unsecured payments plus escrows can strain a new budget.
- Build an exit plan to refinance or pay down the second when feasible.
Structuring for future assumability
A non-assumable second can bottleneck your resale via assumption later. If you expect to resell with another assumption, negotiate an assumable carryback or plan to reconvey the second at payoff. Counsel buyers about these downstream realities now.
- Assumable seconds improve your marketability to future assumption buyers.
- Non-assumable seconds may require a refinance or full payoff at resale.
- Clear disclosures protect expectations and reduce disputes at your future listing.
- Include an assumption/resale addendum covering the second’s treatment at a future sale.
- Track amortization; prepayment language can smooth an early payoff if needed.
- Keep complete records; future buyers and servicers will ask for the second’s documentation.
Process timeline: from offer to closing
Coordinated approvals keep the assumption on schedule. Work in parallel: assumption authorization, second-lender underwriting, subordination documentation, and settlement prep. Closing agents should verify recording order and funds flow.
- Week 1–2: Submit assumption request and second-lien application; gather income, asset, and CLTV docs.
- Week 3–4: Obtain approvals, finalize terms, clear DTI conditions, and draft subordination agreement.
- Week 5: Balance fees, confirm “no cash back” compliance, record in correct order, and fund.
- Hold a weekly huddle among buyer, agents, servicer, second-lender, and title.
- Update payoff/assumption numbers before CD to avoid table-funding delays.
- Confirm insurance endorsements name both lienholders appropriately.
Comparison: which gap strategy fits your profile?
Different gap tools serve different borrowers. Use this table to pick the most sustainable structure for today’s closing and tomorrow’s flexibility.
| Option | Pros | Cons | Best For |
|---|---|---|---|
| Second Mortgage | Predictable underwriting; clear CLTV rules; credit unions can be flexible | Processing time; rate higher than VA first; closing coordination | Strong credit, steady income, need structured terms |
| Seller Carryback | Flexible terms; faster; can tailor payment to DTI | May be non-assumable; legal drafting needed; relationship risk | Tight timelines, sellers open to finance |
| Personal Loan | Fast approval; unsecured | Higher rate; short term; DTI pressure | Small gaps; strong income to absorb payment |
| Post-Close HELOC | Potentially lower rate than unsecured; interest-only options | Requires equity; timing after closing; separate underwriting | Stable value markets, planned improvements |
- Pick the option that keeps CLTV within limits and leaves emergency reserves intact.
- Favor fully amortizing payments over balloons to preserve future marketability.
- Model five-year costs, not just month one; rate and term structure matter long-term.
- Stress-test DTI with ±0.50% tax/insurance swings.
- Right-size the second so post-closing savings remain healthy.
- Document the plan for payoff or assumption of the second at resale.
Common mistakes to avoid
Small errors can derail an otherwise solid assumption. Avoid cash-back violations, unrecorded subordination, and ignoring the second’s payment in DTI. Ensure every dollar on the CD aligns with VA’s allowed uses.
- Cash back to buyer at closing—proceeds must go only to allowed costs and seller equity.
- Missing subordination agreement—threatens first-lien priority and assumability.
- Underestimating escrow increases—taxes/insurance can tip DTI over the line.
- Audit the CD against the second’s note and VA requirements before signing.
- Keep communication open with the servicer on assumption file completeness.
- Secure written confirmation of recording order from title.
Step-by-step: build a compliant gap solution
Use this checklist to keep every stakeholder aligned. It’s built to minimize surprises and protect future assumability.
- Confirm assumption eligibility with the servicer and gather payoff/assumption figures.
- Choose the gap tool; obtain term sheets; run DTI/CLTV/residual tests.
- Draft subordination, note, deed, and disclosures; schedule closing sequence.
- Finalize CD, verify “no cash back,” record liens in order, fund, and deliver copies.
- Store all second-lien docs for future buyers; it eases a later assumption.
- Set calendar reminders for payment due dates and any rate changes.
- Reassess refinancing or payoff opportunities annually.
The Bottom Line
VA assumptions can legitimately include secondary financing to bridge the gap between price and the assumed VA balance. The key is clean structure: the second must be subordinate, fully disclosed, underwritten into your DTI, and used only for allowable costs and seller equity. Second mortgages and seller carrybacks are the most common solutions; personal loans and post-close HELOCs can work in niche cases. Respect CLTV limits, protect first-lien priority, and confirm “no cash back.” If the second isn’t assumable, be upfront about potential resale limits. With coordinated approvals, precise documentation, and realistic payment planning, you can close the assumption smoothly and keep future options open.
Frequently Asked Questions
Can a second mortgage be used with a VA assumption?
Yes. It must be subordinate to the VA first, fully documented, and its payment included in DTI. Proceeds may pay allowed costs and seller equity only—no cash back to the buyer at closing.
Is a seller carryback legal for the cash gap?
Yes. The seller can carry a second note for the difference. Ensure proper documentation, subordination, and underwriting inclusion of the payment. Clarify whether the carryback will be assumable by a future buyer.
What’s the typical CLTV limit for a second lien?
Many second-lenders cap combined LTV around 85–90% of market value. This is lender policy, not a VA cap, so shop for a lender whose guidelines fit your profile and valuation.
Can I get cash back at closing from the second?
No. Funds from secondary financing on an assumption can only cover allowable closing costs and seller equity payout. Cash back to the buyer violates program conditions.
How does the second affect my DTI and approval?
The second’s monthly payment must be included in your DTI and residual income analysis. Plan for taxes, insurance, and HOA too—escrow increases can shift totals more than expected.
Are interest rates on the second negotiable?
Yes. Seconds typically price higher than the assumed VA rate, and terms vary by lender or seller carryback. Compare five-year costs across options, not just the first payment.
What if the second isn’t assumable later?
If the second cannot be assumed, a future buyer may need to refinance or pay it off to assume your VA first. You must be counseled about this restriction before closing.
Can I use a personal loan for the gap?
Sometimes. Unsecured loans can close faster but usually carry higher rates and shorter terms. Their payment increases your DTI, so confirm affordability before proceeding.
What about taking a HELOC after closing?
It’s a viable plan if value and guidelines permit. Title must show you as owner first; then a HELOC can replace temporary funds used to close the assumption.
Who prepares the subordination agreement?
Typically the second-lender or closing attorney prepares it, and the title company ensures it’s recorded so the VA first remains senior. Always verify recording order prior to funding.
Levi Rodgers is the Founder of VA Loan Network, a leading resource for Veteran homebuyer education. A Retired Green Beret and Broker-Owner of LRG Realty in San Antonio, Levi leverages his military discipline and real-world real estate expertise to provide Veterans with expert loan advice, guidance, and trusted financial leadership.
