Assuming a VA Loan After Divorce: What You Need to Know

Going through a divorce is difficult enough without having to worry about what will happen to your VA home loan. If you and your spouse purchased a home using a VA-backed mortgage, you have a few options when it comes to the loan after your divorce is finalized. One option is for your ex-spouse to assume the existing VA loan.

Assuming a mortgage instead of refinancing or selling the home can be advantageous in certain situations. However, it also comes with some potential drawbacks you’ll want to fully understand before making this choice. In this comprehensive guide, we’ll walk through everything you need to know about assuming a VA mortgage after divorce

What Is a VA Loan Assumption?

Let’s start by making sure we’re all on the same page about what it means to assume a mortgage,

Assuming a loan simply means taking over the responsibility for an existing mortgage loan from the current owner(s). The person assuming the loan steps into the shoes of the original borrower. They become obligated to make the monthly payments and adhere to all other terms of the loan.

VA loans can be assumed by qualified borrowers after a divorce. Your ex-spouse would go through an application process with the mortgage lender to take over the loan in their own name. As the original borrower, you would be released from the mortgage obligation.

It’s important to understand that a VA loan assumption does not require refinancing the mortgage. The interest rate and loan terms remain the same. This can make assumptions advantageous when interest rates have risen significantly since the original mortgage was taken out.

When Does a VA Loan Assumption Make Sense After Divorce?

There are a few situations where assuming a VA loan could be the best course of action after a divorce:

• You want a clean break. If you’re ready to completely detach yourself from the marital home, a loan assumption can make that happen more quickly than selling or refinancing. Once approved, your ex would be fully responsible for the mortgage, and your name is off the loan.

• Interest rates have risen. Assumptions allow you to keep the existing VA mortgage with its lower interest rate rather than refinancing at a higher rate. This saves money over the life of the loan.

• You’re underwater on the mortgage. If you owe more than the home is worth, an assumption may be better than selling and having to bring money to the closing table to pay off the loan.

• Your ex plans to stay in the home long-term. Since assumptions don’t require fees and closing costs, they make sense if your ex-spouse wants to remain in the home for many more years.

• You want to preserve your VA entitlement. Handing off the loan through an assumption allows you to restore your full VA home loan benefit for future use.

As you can see, in the right circumstances, a VA mortgage assumption could be advantageous for both you and your former spouse. Next, let’s look at the specific requirements.

VA Loan Assumption Requirements

Not just any borrower can assume a VA loan after divorce. The Department of Veterans Affairs has specific criteria the assuming spouse must meet:

• Credit score: The minimum credit score requirement for a VA assumption is usually around 620, but each lender sets their own threshold. Your ex’s credit will be thoroughly reviewed.

• Income/debt ratios: Assuming borrowers must demonstrate enough income to support the monthly mortgage payments while keeping other debt low. Typical VA standards of no more than 41% debt-to-income and 29% housing ratio apply.

• Funding fee: All VA loans require an upfront VA funding fee. For assumptions, the fee is 0.5% of the loan balance. The assuming borrower must have funds available to pay this fee.

• Occupancy: The home must become the assuming borrower’s primary residence. VA loans can’t be assumed for investment properties.

• Loan status: The existing VA loan can’t be delinquent or in default to qualify for an assumption. All payments must be current.

Meeting the credit, income, and VA funding fee requirements is usually the most challenging part of qualifying to assume a loan. VA guidelines are fairly strict. Your lender will review everything thoroughly to minimize risk before approving an assumption.

How to Assume a VA Mortgage After Divorce

If your spouse appears to meet the requirements, here are the steps involved in completing a VA loan assumption:

1. Contact your mortgage servicer and ask for loan assumption forms and documentation requirements.

2. Collect financial documents for your ex-spouse including income statements, tax returns, bank statements, and debts.

3. Complete the assumption application and gather supporting documents. These likely include things like divorce decree, verification of VA eligibility, and DD214 military discharge papers.

4. Submit the assumption application and documentation to your lender for underwriting review.

5. The lender processes the application and notifies you if your ex-spouse qualifies based on VA guidelines.

6. Once approved, your ex will sign the loan assumption agreement taking over the mortgage.

7. The lender files paperwork with the VA to transfer liability for the loan. Your ex is now the sole borrower.

The entire VA loan assumption process typically takes 30-60 days from start to finish. It’s critical that mortgage payments remain current throughout the process.

Pros and Cons of VA Mortgage Assumptions

Like any major financial decision, there are both advantages and potential disadvantages to weigh when considering having your ex assume your VA home loan.

Pros

• Releases you from liability for the mortgage
• Typically faster and lower cost than refinancing
• Maintains original lower interest rate on loan
• Allows you to restore your VA entitlement
• No closing costs or fees (except funding fee)

Cons

• Your ex-spouse must qualify with lender
• Not possible if loan is delinquent
• Home must remain primary residence
• Funding fee still required
• No chance to lower interest rate via refi

Looking at both the positives and negatives will help you determine if a VA loan assumption aligns with your priorities and situation after your divorce.

What Happens to Your VA Entitlement?

One of the biggest advantages of allowing your ex-spouse to assume your VA loan is restoring your full VA home loan benefit, also known as entitlement.

When you originally purchased the home using a VA mortgage, your entitlement was charged based on the loan amount. While an active VA loan is open, your available entitlement to purchase another home with a VA loan is limited.

However, when your ex assumes the loan through an approved assumption, the entitlement will be automatically restored to you. This “frees up” your eligibility to buy another home with a VA loan in the future.

The only way to restore VA entitlement without a loan assumption or paying off the mortgage is through a VA release of liability. But this involves an extra step and waiting period. With an assumption, it happens automatically upon closing.

Is a VA Loan Release of Liability Still Needed?

Some people mistakenly believe that once a VA mortgage assumption goes through, they are automatically released from liability on that loan.

This is not the case. Loan assumptions and releases of liability are two distinct, separate processes.

After your ex assumes your VA loan, you must still obtain an official VA release of liability to ensure you have no remaining responsibility for that mortgage. This protects you if your ex-spouse defaults on the loan later on.

The release of liability paperwork can be completed along with the loan assumption. Or you can submit it on its own after the assumption closes. Either way, be sure this critical step is taken to finalize the process.

Make an Informed Choice About Your VA Mortgage

Dividing up jointly-owned assets like a home is never easy, but understanding your options will help you make the best decision about your VA mortgage after divorce. Assuming the loan can be a smooth path that benefits you and your ex-spouse in certain situations.

Weigh the pros and cons, speak with your lender, and make sure you get professional guidance regarding your VA entitlement and liability. With the right information, you can develop a solid financial plan as you move into your new life chapter.