Understanding How Divorce Impacts Your VA Loan

Divorce is a difficult process, emotionally and financially. Beyond the personal challenges, there are also major financial decisions to make, especially when real estate is involved. For many couples, their home is their biggest asset and their mortgage is their largest debt.

For Veterans and service members who purchased a home with a VA loan, the financial implications of divorce can be even more complex. From deciding who keeps the home (if anyone) to understanding how VA loan entitlement is affected, knowing your options can help you confidently move forward.

1. Sell the Home

Selling the property offers a clean break for you and your ex. You sell the home, use the proceeds to pay off the VA loan and split the remaining profit between the two parties. Then, you can each go your separate ways without further obligations to the property.

Check our home sale calculator to see how much you could make from the sale of your property.

2. Seek a Release of Personal Liability

The VA no longer requires a formal loan assumption to remove a civilian ex-spouse from financial liability. If the divorce decree or separation agreement awards the home to the Veteran, the lender can simply remove the ex-spouse from the loan without going through an assumption process.

In most cases, the lender will need a copy of the divorce decree or separation agreement showing the Veteran is awarded the property, along with a legal document transferring ownership to the Veteran. This allows the Veteran to take full responsibility for the mortgage while keeping their VA loan benefits.

3. Have Your Ex-Spouse Assume the Loan

A VA loan assumption after a divorce is possible as long as the civilian meets the lender’s requirements in terms of credit and income. As the Veteran, you would be released from further responsibility for the property.

But this option has a significant potential downside: Your VA entitlement would remain with the property.

In this scenario, you have to wait until the debt on the VA mortgage is paid in full before you can restore your entitlement. Not having your full VA entitlement would limit your 0% down purchase power. Sometimes, it could hold you back from using the VA loan altogether.

4. Refinance Your Ex-Spouse Off of the VA Loan

If you are entitled to VA loan benefits, and your ex-spouse is a civilian, refinancing your existing mortgage can remove them from the loan. In many cases, VA borrowers can use the VA’s IRRRL refinance, also known as a streamline refinance, to simplify the process and reduce costs. To qualify, the new interest rate must be at least 0.5% lower than the current interest rate.

If you need to buy out your ex-spouse’s share of the home’s equity as part of the divorce settlement, a VA Cash-Out refinance is another option. This refinance replaces your existing VA loan with a new one while allowing you to tap into your home’s equity to compensate your ex-spouse. While it provides financial flexibility, it does come with credit and income requirements and may change your monthly mortgage payment.

With either option, your ex-spouse is removed from the loan and the property’s title, leaving you as the sole owner with full financial responsibility. Refinancing may result in higher finance charges over the life of your loan.

VA Loan Occupancy Rules During a Divorce

VA loan occupancy rules require Veterans to use VA loans only for primary residences, limiting their options for handling the property. For example, a Veteran couldn’t refinance the home solely in their name to move out and allow their ex-spouse to stay and pay rent. This would make the home an investment property and violate VA requirements.

But life changes, and some lenders allow homeowners to rent the VA-purchased property after meeting the initial occupancy requirement. In this case, the Veteran could refinance to remove their ex from the loan, live in the home for at least 12 months and then choose to rent it out.

VA Loan Entitlement After Divorce

Your VA loan entitlement allows you to access your VA loan benefits. Once you purchase a home with a VA loan, your entitlement generally remains with that home until the debt is paid in full.

But in the case of divorce, your VA entitlement could be restored by refinancing you (the Veteran) off the loan, selling the home, having your ex assume the mortgage if they are a Veteran or seeking a release of liability. Your entitlement stays tied to the property and is not restored if your ex is a civilian and they assume the VA mortgage.

VA loan entitlement is complex even under the best circumstances. This means that complicated situations like divorce can make your entitlement exceedingly difficult to navigate.

Talk to a Veterans United loan specialist at 855-259-6455 or get started online today to explore your VA loan options and find the best path forward.