Navigating VA Home Loans During Divorce: A Complete Guide

Going through a divorce is difficult enough without having to unravel the complexities of a VA home loan. If you or your spouse served in the military your home was likely financed with a VA loan. These government-backed loans offer great benefits like no down payment and lower interest rates. However, they also come with specific rules and requirements that affect what happens when a married couple splits up.

In this comprehensive guide, we’ll walk through everything you need to know about dealing with a VA home loan during divorce.

First, let’s start with an overview of what VA home loans are and who is eligible for them.

The U.S. Department of Veterans Affairs guarantees VA home loans for eligible servicemembers and veterans. These loans are administered by private lenders but backed by the VA. That means if the borrower defaults, the VA will reimburse the lender.

Key eligibility requirements for VA loans

• Served minimum active duty period (usually 90 days)
• Received honorable or general discharge

Main benefits of VA loans:

• Require no down payment
• Have lower interest rates than conventional loans
• Don’t require private mortgage insurance
• More flexible credit requirements

VA loans can be used for:

• Buying a primary residence
• Refinancing an existing VA loan
• Making energy efficiency improvements

Borrowers must intend to use the home as their primary residence. VA loans cannot be used for investment properties or vacation homes.

Now let’s look at what happens when a married couple with a VA loan decides to get divorced.

Dividing Up a VA Home Loan in Divorce

If you’re getting divorced, your VA mortgage is likely one of the biggest assets you’ll need to divide. There are a few options for handling an existing VA loan:

Sell the Home

The easiest way to split your VA loan in divorce is to sell the home. The proceeds from the sale pay off the mortgage debt, and any remaining profit can be divided between spouses as agreed in the divorce settlement. This provides a clean break for both parties.

Refinance One Spouse Off the Loan

If one spouse wants to keep the home, they can refinance the mortgage into their name only. The VA offers a streamlined Interest Rate Reduction Refinance Loan (IRRRL) that allows releasing the other spouse from liability while keeping the home.

The remaining spouse becomes sole owner, while the departing spouse no longer has financial responsibility for the home. Their portion of the VA entitlement is freed up for future use.

Convert to Non-VA Loan

If the non-veteran spouse keeps the home, they’ll need to refinance into a non-VA conforming loan. VA loans require the borrower to be a veteran or servicemember. But the civilian spouse can still take over the mortgage alone by refinancing with a new lender.

They should be aware they may get less ideal loan terms compared to a VA loan.

Change Nothing (Risky)

Legally, it is possible for ex-spouses to retain joint ownership and liability for a VA loan after divorce. We don’t recommend this as it requires ongoing cooperation and can cause major issues later if the remaining spouse doesn’t make payments.

It’s best to formally divide the asset during divorce by selling or refinancing.

Pitfalls to Avoid with VA Loans & Divorce

While VA loans offer great home financing, they come with specific rules you need to know during divorce:

• Occupancy Requirements – The VA requires borrowers to use the home as their primary residence. You cannot turn it into a rental property or vacation home.

• Entitlement Tied Up – Even if your ex keeps the home and loan, your entitlement is still tied up in it until the mortgage is totally paid off. This limits your ability to buy another home with a VA loan.

• Automatic Approvals – Lenders won’t automatically remove your spouse from the VA loan or title after divorce. You must contact them and formally request the change.

• Loan Assumption – Non-veteran spouses cannot assume the VA loan directly. They must refinance into a non-VA loan type to take ownership.

• Rental Income – Do not rent out a home secured by an active VA loan. This violates the occupancy rules and puts your entire VA benefit at risk.

Effect on VA Entitlement

VA entitlement refers to the amount of guarantee the VA provides on a veteran’s loan. It’s based on factors like length of service and whether you’ve used the benefit before.

Divorce can complicate VA entitlement in a few key ways:

• If your ex keeps the home and loan, your entitlement stays connected to that mortgage until it’s paid off. This limits your ability to buy another home with a VA loan.

• If you sell the home, any remaining VA loan balance after sales proceeds must be fully paid off to free up your entitlement again.

• The division of entitlement between spouses may become an issue to negotiate in your divorce settlement.

• If you’ve used a large share of your entitlement, your ex could seek reimbursement for the lost value, especially if it hurts your ability to get a new VA loan later.

Refinancing a VA Loan After Divorce

Once the divorce is finalized, the remaining homeowner has a few options to refinance their VA loan:

• IRRRL – This VA streamline refinance is the most popular choice. It offers lower rates and payments without an appraisal or credit check.

• Cash-Out Refi – Borrowers can tap equity and get cash back at closing. Requires an appraisal and stricter credit/income verification.

• ARM to Fixed Rate – An option if you have an adjustable VA loan and want to switch to a fixed rate.

• Energy Improvement Refi – Includes energy upgrades like solar panels in the new loan amount. Can lower utility costs.

Refinancing can also impact your credit score and financial health, which affects new loan eligibility. Pay close attention to:

• Credit inquiries when applying

• Closing old accounts

• Credit utilization ratio

• On-time payment history

Frequently Asked Questions

Can I get another VA loan in the future after divorce?

Usually yes, if you have remaining entitlement available. The VA will require proof that any existing entitlement was restored after your previous VA loan closed. Your credit and finances post-divorce also factor into new loan approval.

Does refinancing my VA loan hurt my credit score?

It can temporarily dip your score if it generates a hard credit inquiry or closes older accounts. But on-time payments on the new loan can quickly offset this.

What are my options if I’m not the veteran spouse?

You likely cannot assume the VA loan directly. But you may be able to refinance the mortgage into your name alone with a non-VA loan. State laws and divorce agreements dictate property rights. Seek legal advice about your options.

Can I remove my spouse from the VA loan after divorce?

Yes, through refinancing you can release your spouse from the loan obligation and remove their name from the home title. VA offers streamlined IRRRL refinancing that simplifies this process for the remaining veteran homeowner.

What happens if I break the VA loan occupancy rules?

You risk being in default on the loan and losing your VA home loan benefit eligibility. Neither spouse should attempt to rent out a home secured by an active VA loan.

Key Takeaways

• VA home loans offer great benefits but also have specific requirements that affect divorce.

• To split a VA loan, you can sell the home, refinance into one spouse’s name, or convert to a non-VA loan type.

• Refinancing is necessary to formally remove an ex-spouse from a VA loan after divorce.

• Letting your ex keep the VA loan ties up your entitlement until the mortgage is paid off.

• Occupancy and rental income rules still apply after divorce. Violations can jeopardize your VA benefits.