What Happens to a VA Loan in a Divorce?

VA loans offer significant benefits and favorable terms for homeownership to eligible servicemembers, veterans, and their spouses. In a divorce, VA loans present unique considerations compared to conventional mortgages. Managing a VA loan during this time requires careful attention to federal guidelines and financial processes. Decisions about the marital home and its VA loan can have lasting implications for both parties.

Deciding the Fate of the Marital Home

Divorcing couples with a VA loan on their marital home must decide its future. Selling the home is a common, straightforward resolution. When sold, proceeds pay off the VA loan, and any remaining equity is distributed per the divorce agreement. This removes both parties from the loan obligation and frees the veteran’s entitlement for future use.

Alternatively, one spouse may retain the home. This option requires a more intricate financial arrangement to address the existing VA loan. If one spouse keeps the home, the other must be released from loan liability. This process involves the spouse retaining the home either assuming the existing VA loan or pursuing new financing to buy out the other spouse’s interest. These solutions allow one party to remain in the home but necessitate a formal process to adjust financial obligations and ownership.

Navigating a VA Loan Assumption

A VA loan assumption allows one party to take over the existing VA loan, maintaining its original terms. This keeps the existing loan’s interest rate and repayment schedule unchanged for the assuming party. The spouse taking over the loan, often a non-veteran, must demonstrate creditworthiness and income stability to the lender. The lender assesses their financial capacity to manage mortgage payments.

Eligibility requires meeting the lender’s credit score criteria and proving sufficient income for monthly payments. Required documentation includes recent pay stubs, W-2 forms, tax returns, and bank statements to verify financial standing. The lender also requires the finalized divorce decree and any property settlement agreement outlining asset and liability division.

The process begins with an application to the original loan servicer. This lender conducts an underwriting review to ensure the assuming party meets financial requirements. Once approved, the closing process formalizes the liability transfer, releasing the original borrower. A VA funding fee, 0.5% of the loan amount for assumptions, is assessed and can be financed or paid upfront.

Utilizing VA Refinance Options

VA refinance options, primarily the VA Interest Rate Reduction Refinance Loan (IRRRL) and the VA Cash-Out Refinance, can address a VA loan during divorce. The VA IRRRL allows a streamlined refinance to reduce the interest rate or convert an adjustable-rate mortgage to a fixed rate, often without an appraisal or extensive credit underwriting. In divorce, an IRRRL can help the spouse keeping the home lower monthly payments, but it does not provide cash for equity buyouts.

The VA Cash-Out Refinance allows a homeowner to refinance for more than they owe, converting equity into cash. This option is often used in divorces to buy out a spouse’s equity or consolidate debts. Eligibility for a VA Cash-Out Refinance includes meeting credit and income requirements, and the property must be appraised to determine its market value. The maximum loan amount is capped at 100% of the home’s appraised value.

Applying for both VA refinance types involves working with a VA-approved lender. For a Cash-Out Refinance, a new appraisal is required, and the lender performs a full underwriting review. An IRRRL has a more streamlined process, potentially requiring less documentation. Both refinance options facilitate removing a former spouse from the loan and title, formalizing new ownership and financial responsibility. A VA funding fee applies to refinances: IRRRL funding fee is 0.5%, and Cash-Out Refinance funding fee is 2.15% for first-time use or 3.3% for subsequent use, which can be financed.

Managing VA Entitlement Post-Divorce

The veteran’s entitlement, the guarantee the Department of Veterans Affairs provides to the lender, is a distinct VA loan benefit affected by divorce. If the VA loan is paid off through sale or refinance, the veteran’s entitlement is restored. This allows the veteran to use their full VA loan benefit for a future home purchase. The Department of Veterans Affairs provides forms, such as VA Form 26-1880, “Request for a Certificate of Eligibility,” to help veterans ascertain their remaining entitlement.

When a VA loan is assumed by another qualified veteran, the original veteran’s entitlement may remain tied to that loan until the assuming veteran secures a new VA loan or refinances. If a non-veteran assumes the loan, the original veteran’s entitlement remains encumbered until the loan is fully satisfied or refinanced. Entitlement restoration requires the original loan to be paid in full and the property disposed of.

A non-veteran ex-spouse cannot retain or use the veteran’s VA loan entitlement. The entitlement is a personal benefit tied to the veteran’s service. While a non-veteran ex-spouse may assume the VA loan under certain circumstances, they do not gain claim to the veteran’s underlying entitlement for future VA loan use. The veteran remains the sole holder of this benefit.