Can You Keep Your Home with a VA Loan After Divorce?

Getting divorced is never easy but it can get even more complicated when a couple jointly owns a home financed with a VA loan. With emotions running high sorting out real estate and determining who gets to keep the house is often contentious. If you’re going through a divorce and trying to figure out what will happen with your VA mortgage, this guide will provide the key details you need to know.

Overview of VA Loans and Divorce

VA loans are mortgage loans guaranteed by the Department of Veterans Affairs that allow eligible servicemembers, veterans and surviving spouses to purchase a home with no down payment. These loans offer beneficial terms, but they also come with certain requirements around occupancy, eligibility and entitlement that impact what happens when a couple with a VA loan decides to split up.

Some of the key factors with VA loans and divorce include:

• Occupancy Rules The home must be the borrower’s primary residence This makes it difficult for one spouse to keep the home as a rental or vacation property

• Eligibility: Only veterans, active duty servicemembers and surviving spouses can have VA home loan eligibility and entitlement. Civilian spouses cannot directly qualify for a new VA loan once divorced.

• Entitlement: The veteran’s entitlement is attached to the property until the loan is paid off. But entitlement can potentially be restored through certain options upon divorce.

Can a Civilian Spouse Keep the House with a VA Loan After Divorce?

Yes, it is possible for the civilian ex-spouse to keep the home secured by an existing VA loan after the divorce. There are a couple options that allow this:

• Assume the VA loan: The civilian spouse assumes responsibility for the existing VA loan, if they meet credit and income requirements. This allows them to stay in the home without refinancing.

• Refinance to a non-VA loan: The civilian ex-spouse refinances into a new conventional, FHA, USDA or other non-VA mortgage in their own name only. This removes the veteran’s liability.

Assuming the VA loan is often the simplest option since it allows the ex-spouse to stay in the home without the cost and paperwork hassles of a refinance. As long as they qualify, a civilian can assume a VA loan, release the veteran’s liability and remain on the original low interest rate VA financing.

What Happens to a VA Loan During Divorce?

There are several options for dealing with a VA loan during a divorce:

• Sell the home: The home is sold and proceeds pay off the VA loan, with any profit split. This provides a clean break.

• Refinance veteran off loan: The veteran refinances into a new VA loan alone, removing the spouse.

• Spouse assumes loan: Civilian ex-spouse assumes the VA loan if eligible. The veteran is released from liability.

• Release of liability: The veteran seeks a release of liability from VA while ex-spouse remains on the loan.

Let’s look at the pros and cons of each option in more detail:

Sell the Home

Selling the house offers a definitive way for ex-spouses to completely move on. Once sold, the VA loan is paid off and is no longer an issue. Proceeds from the sale can be split equitably based on the divorce decree. This option makes the most sense if both spouses want a fresh start. However, selling can involve fees and inconveniences. And if the market is down, the house may have to sell for a loss.

Refinance the Veteran Off the Loan

If the veteran wants to split off the mortgage obligation and remove liability, they can refinance the loan in their name only through a VA streamline refinance. This leaves the ex-spouse on the original loan.

This allows the veteran to purchase another home sooner since their entitlement is restored. But the ex-spouse will still need to qualify on their own for the loan long term.

Spouse Assumes the VA Mortgage

Assumption of the VA loan by the ex-spouse is often the easiest way for them to keep the home. As long as they meet credit and income requirements, the civilian can assume the loan, release the veteran from liability and continue paying the existing mortgage.

However, the veteran’s entitlement would remain tied up with the property until the loan is paid off. This limits their ability to reuse the VA home loan benefit.

Seek Release of Liability

The veteran can request a release of liability from VA while the ex-spouse remains on the loan. This removes the veteran’s responsibility for the mortgage debt.

Much like assumption, the entitlement would remain with the property until payoff. And the ex-spouse still needs to continue qualifying for the loan on their own.

What About VA Loan Entitlement After Divorce?

A veteran’s VA loan entitlement allows them to access the program’s benefits, like purchase with no down payment.

When using VA entitlement to buy a home, that entitlement remains attached to the property until the loan is paid off. But in cases of divorce, the veteran may be able to get entitlement restored sooner through either refinancing off the loan, selling the home, assumption by the ex-spouse or obtaining a release of liability from VA.

Without restoration of entitlement, the veteran won’t be able to purchase another home using their VA benefits, or will have limited purchase power based on any available entitlement.

Restoring entitlement should be a priority for a veteran giving up ownership of a VA-financed home in a divorce. This ensures you can purchase another home in the future with your full VA home loan eligibility.

Can an Ex-Spouse Qualify for a New VA Loan?

Unfortunately, ex-spouses cannot qualify for VA loans on their own, even if they are remaining in the former marital home with a VA loan.

The following categories of people are eligible for VA loans:

• Veterans
• Active duty military
• Surviving spouses of eligible veterans

Unless the ex-spouse remarries an eligible veteran or servicemember, or serves in the military themselves, they won’t qualify for VA financing in their own name.

The only option for an ex-spouse to have a VA home loan after divorce is to assume the existing VA mortgage (if qualified). But they won’t be able to get a new VA mortgage later.

Occupancy Requirements for VA Loans and Divorce

VA loans have strict requirements that the home must be the borrower’s primary residence. This limits options on handling the home in a divorce:

• The veteran can’t keep the home as a rental property with tenants while going through a divorce.

• The ex-spouse is limited to either assuming the mortgage or obtaining a non-VA refinance in order to remain in the home.

• The veteran can’t transfer the home to the ex-spouse as a second home or vacation property.

These occupancy rules place restrictions around creatively splitting up ownership of a VA-financed home upon divorce. The home must remain the primary residence of the party retaining or assuming ownership.

Other Key Considerations

Here are some other important points to factor around VA loans when dealing with divorce:

• Any partial claims paid out on a VA loan must be repaid upon transfer of the property, including divorce-related assumption or quitclaim deed.

• The party assuming a VA loan will pay a funding fee of 0.5% of the balance, unless they are exempt.

• There may be tax implications for the division of home equity and sale or transfer of the property. Consult a tax pro.

• Get legal guidance before signing any deed transfers or loan assumptions. Understand all implications.

• Act quickly once a divorce is finalized to get paperwork filed related to the home transfer, assumption, or release of liability on a VA loan obligation.

The Bottom Line

Divorce is hard enough without having to split up a jointly-owned home financed with a VA loan. But there are options like assumption and refinancing that allow the civilian ex-spouse to retain ownership of the property. Each situation is unique, so consult experienced legal and real estate professionals to understand your options, rights and responsibilities.