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VA Home Loans and Divorce: Everything You Need to Know

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. 

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.

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 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. 

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. 

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. 

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.  

 

References

VA Guarantees More Than 1 Million Home Loans in Record Year. (October 2020). U.S. Department of Veterans Affairs.
Lender's Handbook, VA Pamphlet 26-7. U.S. Department of Veterans Affairs.