VA Home Loans and Divorce: Everything You Need to Know

• What is a VA home loan?
• What can you do with a VA loan after divorce?
• What can’t you do after divorce?
• VA home loan occupancy requirements
• Can civilians keep the VA home after divorce?
• Understanding VA loan rules during divorce
• What is VA loan entitlement?
• FAQ
• References

The U.S. Department of Veterans Affairs (VA) offers a robust home loan program to people who have served the country. In 2020 alone, the VA guaranteed more than 1.2 million loans within this program. If you’re a veteran, this loan likely made your home much more affordable. 

What is a VA home loan?

VA home loans are an incredibly valuable military benefit that helps those who qualify to purchase, refinance, or build homes with better-than-average terms. 

Who can get a VA home loan?

• Veterans who served in the U.S. military
• Active-duty service members
• National Guard and Reserve members
• Certain qualified spouses

Eligibility depends on factors such as length of service, type of service, and discharge status.

Key benefits of VA home loans

1.  No down payment
2.  Lower interest rates compared to conventional loans
3.  No private mortgage insurance (PMI) is required, which reduces monthly mortgage payments
4.  Flexible credit requirements, such as more lenient credit score and debt-to-income ratio requirements
5.  Limits on closing costs
6.  Option for cash-out refinancing, allowing borrowers to tap into their home equity for things like home improvements or debt consolidation

VA loan types

• Purchase loans: Used to buy a primary residence.
• Interest Rate Reduction Refinance Loan (IRRRL): Also known as a VA Streamline Refinance. Allows borrowers to refinance an existing VA loan to lower the interest rate and monthly payments.
• Cash-out refinance: Allows borrowers to refinance their mortgage while taking cash out of their home equity (subject to certain loan limits and requirements).

An additional benefit is that they are backed by the U.S. Department of Veterans Affairs, which provides a guarantee to lenders, making it a less risky loan.

In divorce, your VA loan requires special attention. Banks administering your loan don’t automatically understand your divorce agreements, and they may not agree to some arrangements without a little legwork.

This blog provides the information needed to help veterans and their spouses navigate divorce proceedings and set the future up for success. Keep reading to learn about your rights, responsibilities, and options so you can make informed decisions, ensuring your financial well-being and housing stability.

If you or your spouse have served in the military, you may want to meet with an expert who specializes in military finances. Our CDFA, David Smith, specializes in military divorce and finances. Book an appointment or read his bio here.

What can you do with a VA loan after divorce?

Your home is a large marital asset, and you must split it in divorce. Three main options exist. 

1. Cancel the loan by selling the house

The quickest and easiest way to address your VA loan is to sell the home and split the proceeds with your spouse. The sale automatically nullifies the loan, allowing you to use your VA benefits to buy a different home with a new loan in your name only. This can be a straightforward way to resolve the VA loan after a divorce. 

2. Remove one spouse from the loan

The VA calls this a release of liability (ROL), and it's available for people who divorce. You can use this option whether you're a veteran or not, but the processes are slightly different. 

If you're a veteran and keeping the loan, contact your regional loan center (RLC) to ask for a Non-Veteran Spouse ROL. The VA will send this form to your mortgage company, indicating that your spouse has no financial obligation. You can't get charged more than $50 for this adjustment. 

If you're not a veteran but are keeping the loan, the procedure is similar. Contact your RLC, and notify them that you're taking the home in a divorce and assuming the property. 

3. Replace the loan with a non-VA product

If the non-veteran spouse wants to keep the home and release the veteran's benefits, a new loan could be a smart idea. Banks could produce a buyout loan, allowing one person to accept full financial responsibility for the home. 

If you don’t work through the VA, you may not get ideal terms. But you would get a loan that keeps you in the home. 

What can’t you do with a VA loan after divorce?

VA loans are designed for primary residences, not rental properties. As a veteran, you can’t share the loan with your spouse and charge rent for that arrangement. Doing so could put the entire benefit at risk. 

Similarly, you can’t share the mortgage and the proceeds of a third party renting the home. Although this could be a smart option for people unwilling to move who want to raise funds, it’s not available to you with your existing VA loan model. 

VA home loan occupancy requirements

VA loan occupancy requirements specify that the borrower lives at the property as their primary residence. Here are the key points regarding VA loan occupancy requirements:

1.  Primary residence: The borrower plans to live in the home as their main and permanent residence. VA loans cannot be used for vacation homes, investment properties, or properties that will be rented out.
2.  Timely occupancy: The borrower is expected to move in soon after the loan closing (usually within 60 days).
3.  Continuous occupancy: Once the borrower moves in, they are expected to reside there for a significant portion of the year. 
4.  Intent to occupy: The borrower's genuine intent to occupy the property must be documented. They can sign a certificate stating such and provide proof of residency such as utility bills or a driver's license), and demonstrate their ties to the community (employment, etc.).
5.  Spousal occupancy: Spouses of eligible servicemembers are generally allowed to occupy the property if it is also the servicemember’s primary residence.

Exceptions may exist in situations involving active-duty servicemembers who are deployed or stationed overseas. In such cases, the VA may grant temporary exceptions to the occupancy requirements, allowing the servicemember's approved family members to live there.

These rules should be taken seriously. Violation of the above VA loan occupancy requirements can lead to consequences such as loan default, loss of VA loan benefits, and potential repayment obligations to the VA. 

Can civilians keep a VA home after divorce?

The VA says people without an entitlement (or benefits incurred via military service) can't get any type of VA loan. 

If you can't afford to buy out your partner without refinancing the home, you can't work with the VA on a new loan. You're not eligible, as you don't meet those strict requirements. 

However, the VA says anyone can assume responsibility for an existing VA loan. If you meet your bank's strict eligibility requirements and can prove your trustworthiness, the institution can remove your partner from the loan and make you solely responsible. This approach has drawbacks, as the veteran spouse can't use those VA benefits until the loan is paid off. 

I am not the servicemember. Can I assume my military spouse’s VA loan? What are my rights?

As a non-military spouse, you generally cannot assume your military spouse's VA loan. VA loan assumptions are typically reserved for eligible veterans or qualified active-duty servicemembers. However, there are several options and rights you may have regarding your military spouse's VA loan:

• Refinancing the loan: If you want to be the new sole owner of the home, this process involves applying for a new mortgage using your information only. 
• Co-borrow or co-sign: You and your military spouse can apply for a new mortgage together as co-borrowers or co-signers. Both of you would be responsible for the loan payments and jointly own the property. 
• Rights to the property: Depending on state laws and the specifics of your divorce, you may have rights to the property, such as occupancy rights, the right to receive proceeds from the sale of the property, or the right to buy out your military spouse's share of the property.
• Equitable distribution: If you’re in an equitable distribution state, the property's value and ownership may be divided fairly between you and your military spouse.

You may decide to seek legal or financial advice to establish what your rights are to your property. Ultimately, while you may not be able to assume your military spouse's VA loan directly, you may still have options during divorce or separation.

Need a high-level idea of what to do with your home? Our HomeSplit solution can help. Or, talk to one of our real estate strategists for free. 

Understanding VA loan rules during divorce

A VA loan is meant to be a benefit that compensates someone who has served their country. While it's a perk, private companies administer these loans, and detailed rules apply.

Lenders must make sure everyone applying for a VA loan (or assuming the balance) is trustworthy and meets loan eligibility requirements. They must also notify the VA if they change who owns the home or the loan. Breaking these rules could cause lenders to lose the opportunity to offer more loans in the future. 

Holding a loan like this is also a responsibility. You're required to tell your bank about arrangements you make during divorce. 

A divorce decree signed by the court isn’t passed to your bank automatically. Instead, you’re required to notify the bank about your plans and fill out the appropriate paperwork to transfer ownership. 

What is VA loan entitlement?

A VA loan entitlement is a guarantee of your benefits as a veteran, but it comes with limits. You can only use this benefit for one loan at a time, and the loan must be a primary residence. 

For example, you could hold a VA loan on a home that you owned during your marriage and retained in your divorce. But if you allow your non-veteran spouse to keep the VA loan, it's still working under your entitlement. That means you can't get another loan with your benefit until the first loan is paid off. 

VA loan entitlement in the context of divorce

If you give your spouse your entitlement during your divorce, it's a big gift. Even if you feel like it isn’t a big deal at the time, it might become a big deal down the road. Think hard about whether you might want that loan for your future plans instead.  

VA loan entitlement refers to the maximum amount that the Department of Veterans Affairs will guarantee on a VA loan, which allows veterans and servicemembers to obtain favorable terms and conditions on mortgage loans.

When a couple who jointly holds a VA loan ends their marriage, there are several possible challenges they may face:

If one spouse assumes the loan, the departing spouse's portion of the entitlement may still be tied up in the loan. For example, if a couple has used $100,000 of their combined entitlement on a VA loan for a property valued at $200,000, and one spouse wants to keep the property, they might need to refinance the loan to release the other spouse's entitlement.

If they sell the property, the VA loan is typically paid off with the proceeds from the sale. However, if there's a remaining balance on the loan after the sale, both spouses' entitlements may still be impacted until the loan is fully paid off. The division of any remaining entitlement between the spouses can become a negotiation point in the divorce settlement.

If either spouse wants to purchase a new home using a VA loan after the divorce, their VA loan entitlement may be affected by the previous loan. The VA typically requires that any existing VA loan entitlement for a previous property must be restored or released before a new VA loan can be guaranteed. This process often involves refinancing or paying off the previous loan in full.

In some cases, one spouse may have used a significant portion of their VA loan entitlement during the marriage. In this case, the divorce settlement may include provisions for reimbursing the other spouse for the lost entitlement value, especially if it affects their ability to secure a VA loan in the future.

Divorce can also impact credit scores and financial stability. If one spouse's credit is compromised due to the divorce, it may affect their ability to utilize VA loan entitlement or secure favorable loan terms.

VA loan entitlement in the context of divorce requires careful consideration and often involves legal and financial expertise to navigate effectively. 

FAQ about VA home loans and divorce

What are some VA home loan refinancing options?

1.  Interest Rate Reduction Refinance Loan (IRRRL) or VA Streamline Refinance: This is one of the most popular options. It allows borrowers with an existing VA loan to refinance into a new VA loan with a lower interest rate. It's called "streamline" because it typically doesn't require a new appraisal, credit underwriting package, or out-of-pocket expenses. There may be a funding fee, which can be rolled into the new loan amount.
2.  Cash-out refinance: Eligible borrowers can refinance their existing VA loan into a new VA loan for an amount that exceeds the current loan balance. This option allows borrowers to receive cash back at closing, which can be used for various purposes such as home updates, debt, or other financial needs. Cash-out refinances typically require a new appraisal and may have different eligibility requirements compared to IRRRLs.
3.  VA Hybrid Adjustable-Rate Mortgage (ARM) Refinance: Borrowers with an existing VA ARM can refinance into a fixed-rate VA loan or another VA ARM with more favorable terms. This helps borrowers who want to switch from an adjustable-rate to a fixed-rate loan (a more predictable monthly payment).
4.  Energy Efficient Mortgage (EEM) or Energy Improvement Mortgage (EIM): These allow borrowers to finance energy-efficient improvements or upgrades into their VA loan refinance. The costs of eligible energy-efficient upgrades, such as solar panels, insulation, or energy-efficient appliances, can be added to the loan amount, potentially resulting in energy savings and increased property value.
5.  Native American Direct Loan (NADL) Refinance: Eligible Native American veterans or their spouses who have an existing NADL loan can refinance it through the VA's NADL refinance program. This can provide lower interest rates or adjust loan terms based on current market conditions.

Will changing my VA home loan impact my credit score?

Yes, it can impact your credit score. Here’s why:

1.  Credit inquiry: When you apply for a new VA home loan or refinance, lenders will typically conduct a hard inquiry on your credit report. This inquiry can temporarily lower your credit score. 
2.  New credit account: This new account can affect your credit score in several ways:
3.  Credit mix: A mix of credit types can positively impact your credit score.
4.  Credit utilization: If you're obtaining a cash-out refinance or increasing your loan amount, your credit utilization ratio may change. Lower ratios generally have a positive impact on credit scores.
5.  Payment history: Making timely payments can help maintain or improve your credit score; missed or late payments can have a negative impact.
6.  Closing accounts: This can impact your credit score by reducing your overall credit limit and potentially affecting your credit utilization ratio; however, the impact depends on your overall credit profile.
7.  Credit age and new credit: If you're replacing an older mortgage with a new one, the average age of your credit accounts may decrease, which can have a minor impact on your credit score.

Read more: Tips to Recover Financially After Divorce

Will I be able to get another VA loan in the future?

Usually. Each eligible veteran or servicemember is entitled to a specific amount of VA loan guaranty, which is based on factors such as service history, type of service, and whether you've used your VA loan entitlement before. During a divorce, the division of assets, including any VA loan entitlement, can impact your ability to utilize VA benefits for future loans. If your entitlement is tied up in a property from a previous VA loan, you may need to restore or release that entitlement before applying for a new VA loan.

Your post-divorce finances can significantly impact your ability to qualify for a new VA loan. If your credit has been negatively affected by the divorce or if your financial situation has changed, it may affect your loan approval and terms.

If you were a co-borrower on a VA loan during your marriage and that loan is still active or has a remaining balance after the divorce, it can affect your ability to obtain a new VA loan. 

To apply for a new VA loan, you'll need a valid Certificate of Eligibility (COE) from the VA. The COE confirms your eligibility for VA home loan benefits based on your military service history. If you've used your VA loan entitlement before, the VA may require documentation to show that your entitlement has been restored or released from previous loans before issuing a new COE.

If you or your spouse have served in the military, you may want to meet with an expert who specializes in military finances. Our CDFA, David Smith, specializes in military divorce and finances. Book an appointment or read his bio here.

Need help understanding your home-related options?

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References