Wednesday, March 8, 2017

Divorce and Your VA Loan -- Now What?

VA loan entitlement is a benefit offered to eligible military members and surviving spouses. Military spouses are included in this benefit by association. This distinction is important because it affects what happens to a VA mortgage in the case of divorce. In a divorce, the non-military spouse loses VA loan rights.

When a VA mortgage is processed, the guaranty remains with the loan even if the veteran stops living in the home. The only way to remove the VA guaranty is refinancing the loan into a conventional mortgage or selling the home so the veteran can become eligible for a new VA loan. Jointly held mortgages are a bit different. In this case, only one spouse needs to qualify for the VA loan and the guaranty is no longer attached only to the veteran borrower.

This can introduce complications. If neither spouse can qualify for a new mortgage and the loan is not paid off by selling the home, the veteran will be unable to take out a new VA loan while the original loan exists.

What Happens to the VA Loan in Divorce?

Couples who own a home together with a VA loan have several options in a divorce.

One solution is selling the property and dividing any equity or debt between the spouses. This option frees both spouses from the mortgage and allows the veteran to become eligible for a new VA loan.

Sole ownership of the home can also be designated to one spouse who can then refinance the mortgage into their name alone. This option also frees the veteran from the loan guaranty. This solution is most common when it's the non-military spouse who will remain in the home.

A release of liability for credit and legal purposes can be requested from the VA instead. In this case, the request is processed by the VA when the veteran and spouse are both co-borrowers but the co-borrower wants to be released from the loan. To be approved for a release of liability the divorce must be final. The entire estate must remain in the former spouse's name.

A loan assumption or transfer may be used as well. In this case, the mortgage is assumed by the purchaser as-is with the remaining balance and loan term. The veteran does not need lender or VA approval to do a loan assumption. A major downside to this option is the veteran is still liable for the loan if the purchaser defaults on payments.

Rather than using a loan assumption with a non-qualifying borrower, a better solution when possible, is a substitution of entitlement. This is another type of loan assumption in which the new buyer has their own VA loan entitlement which is substituted for the current VA borrower's. The veteran spouse will be free to use their VA entitlement to secure a new loan. This option does require that the purchaser have an entitlement sufficient to substitute for the ex-spouse's VA entitlement. The home also must be occupied by one of them.

In a worst-case scenario, neither spouse can get a new loan after the divorce and the home is occupied by either spouse. In this case, the veteran can't get a new VA mortgage until the original loan is paid off through refinancing, a loan assumption, or sale of the home.

Mortgage Originator Jimmy Vercellino, specializing in VA Loans, helps veterans use their VA loan benefit to their greatest advantage. For more details call us at 480-351-5904. Visit site:

The views expressed here are those of the individual author and do not necessarily represent those of First Choice Bank (NMLS #: 177877) and First Choice Loan Services Inc. (NMLS #: 210764), 7702 E. Doubletree Ranch Road, Scottsdale AZ 85258. Equal Housing Lender.