VA Loans and Divorce: Know Your Options

When military couples divorce, they’ll have to agree on how to divide their assets, including their home. If you used a VA loan to buy the home, understanding your options and obligations can help you make informed decisions during this tough transition.

In summary:

• Selling the home is often the simplest option, providing immediate financial separation and entitlement restoration.
• The civilian ex-spouse can keep the home, but they’ll need to either assume the VA loan or refinance out of a VA loan. In these scenarios, the veteran will need to be mindful of their entitlement. 
• The veteran ex-spouse can keep the home and use one of the VA’s two refinance options (or refinance out of VA, entirely) to remove the ex-spouse from the mortgage.
• If both spouses are veterans with entitlement tied to the home, calculating entitlement restoration and equity division can be complex, but there are ways to navigate it.

Can a Civilian Ex-Spouse Keep the Home?

The short answer is yes. A non-veteran ex-spouse can keep a home with a VA loan through two avenues: loan assumption or refinancing into a conventional mortgage. However, that spouse cannot independently apply for a new VA loan unless they qualify as a surviving spouse under specific Department of Veterans Affairs (VA) guidelines.

VA Loan Assumption

A VA loan assumption enables your ex-spouse to take over your existing VA mortgage under its current terms, rates, and conditions. This is an increasingly popular option as mortgage rates stay above 7%. 

The assumption process requires several steps and qualifications:

Credit Requirements:

• Minimum FICO score of 620 or higher, though some lenders may go lower
• No recent bankruptcies or foreclosures
• Must be current on mortgage payments

Income Verification:

• Proof of stable, sufficient income to cover payments
• Debt-to-income ratio meeting VA guidelines (usually 43% or lower)
• Two years of federal tax returns and W-2s
• Recent pay stubs and employment verification
• Documentation of any alimony or child support (if electing to use it as income for loan qualification)

Documentation Needs:

• Complete the assumption application through the loan servicer
• Copy of divorce decree or separation agreement
• Proof of homeowners’ insurance
• Bank statements showing adequate cash reserves
• Valid government-issued ID

VA Funding Fee and Costs:

• 0.5% funding fee based on the remaining loan balance
• Any assumption fees required by the loan servicer
• New title insurance may be required to transfer ownership
• Recording fees for assumption documentation

VA Entitlement Impact
One key thing a military borrower needs to keep in mind is that their VA loan entitlement is tied to the property — even if the loan is assumed by their ex-spouse, says Bryan Bergjans, national director of growth and strategy with loanDepot.

The only issue with that is the veteran who bought the house with their spouse, their entitlement is still attached to that home. That impacts the veteran’s ability to buy another home with a VA loan, Bergjans notes.

Related: How Many Times Can You Use a VA Loan?

Refinancing Into Another Loan Type

Another option to part ways with a VA loan during a divorce is for the civilian ex-spouse to refinance the VA loan into a conventional or FHA mortgage. However, the spouse must be able to qualify for the new loan on their own income and credit profile. Conventional loans are typically harder to qualify for due to higher credit score and down payment requirements than VA loans.

Conventional Loan Requirements:

• Minimum credit score of 620
• Private mortgage insurance (PMI) required if equity is less than 20%
• Maximum debt-to-income ratio of 45% for most lenders (can go up to 50% in some cases)
• Property must appraise at a sufficient value

FHA Loan Requirements:

• Minimum 580 credit score (or 500 with 10% equity in the home)
• At least 2.25% equity after the refinance (97.75% maximum loan-to-value) 
• More flexible debt-to-income ratios of up to 50% or higher in some cases
• Mandatory upfront and annual mortgage insurance for the life of the loan
• Property must meet FHA safety and habitability standards

3 Options When the Veteran Keeps the Home

If you’re a veteran and decide to keep the home, your next steps depend on whether your ex-spouse is listed on the mortgage. If they are, you may need to refinance to remove them from the loan or request a release of liability from your lender. 

If they’re not on the loan, no action may be needed, though you’ll still need to address ownership of the home in your divorce agreement.

1. Refinance Using a VA Loan

VA offers two primary refinancing paths: the VA Interest Rate Reduction Refinance Loan (IRRRL) and a VA cash-out refinance.

The VA IRRRL, also known as the VA streamline refinance, helps veterans lower their mortgage rate and adjust terms with minimal hassle—no appraisal, no income verification, and lower out-of-pocket costs. Features and requirements include:

• Pay the funding fee of 0.5% of the loan amount
• No new credit qualification is required
• No appraisal
• The rate must drop by 0.5%, for example, from 6.5% to 6.0%
• Refinance must lower your monthly payment
• Cannot be used to withdraw cash
• Faster processing time
• Limited documentation needed

The VA cash-out refinance allows veterans to access their home’s equity or switch to a better loan, but it requires full credit and income qualification, plus an appraisal. Features and requirements include:

• Full credit and income qualification
• Current appraisal required
• Higher funding fee (2.15% for first use, 3.3% for subsequent use)
• Can access up to 100% of the home’s current value (but varies by lender)
• Allows rate/term changes
• More extensive income and financial documentation is needed
• Longer processing time
• Does allow cash out for an equity buyout

“The divorce decree is going to lay out who gets what, who’s responsible for what — and that impacts everybody on what they can do next,” Bergjans says. “Unfortunately, it sometimes doesn’t work out to where the person who wants to stay in the house can. But there are options.”

Bergjans says with housing affordability a challenge, he sees most folks tap a VA loan assumption more often than other options. Or they just sell and go their separate ways.

2. Refinance Into Another Loan Type

If you have 20% or greater equity, you may choose to refinance into a conventional loan. This option helps you avoid VA’s upfront funding fee. If you have 30-40% equity in the home or more, you may have enough for an equity buyout refinance through Fannie Mae.

3. Have the Ex-Spouse Sign a Release of Liability

A release of liability removes the ex-spouse’s obligation to repay the loan without changing the loan type.

Requirements:

• Credit qualification of the remaining borrower
• Proof of regular payment history
• Copy of divorce decree
• Property deed modifications
• Processing fee payment
• Income verification
• Six months of bank statements

Documentation Process:

• Submit a formal request to loan servicer
• Provide updated financial information
• Complete assumption/release package
• Sign new liability agreements
• Record necessary legal documents
• Update homeowners insurance

What If Both Spouses Are Veterans?

Things get a bit trickier when a military couple who have both served have each used their entitlement for the home purchase. First, you need to figure out how to divvy up your respective entitlements by calculating individual entitlement usage and determining restoration eligibility.

Consider whether you plan to use the benefit again in the future and occupancy requirements. You’ll also have to sort out whether you have joint loan assumption possibilities, individual refinancing options, how long it’ll take to restore your respective VA entitlements, and what to do with the property.

Selling the Home

Selling the home is typically the simplest (and cleanest) solution. Not only do you and your ex-spouse get a clean break and immediate liability separation to go your separate ways, the veteran(s) get clear entitlement restoration. In many divorces, equity is split equally, though the final distribution depends on your divorce agreement.

If you decide to sell your home, hire a local real estate agent who can provide a current market analysis and help you stage and market your home. You’ll need to subtract the payoff amount on your current loan, along with any closing costs, from the purchase price to understand your net profit.

VA Loan Occupancy Requirements

VA loans require you to certify that the home will be your primary residence at the time of purchase. However, if your life circumstances change, such as a divorce or military relocation, you’re generally allowed to move out and rent the property without penalty.

For example, it’s common for service members to keep a home they bought with a VA loan and rent it out after moving to a new duty station. In a divorce, you could even rent the home to your ex-spouse as long as the property was originally purchased as your primary residence.

The key is that you must have met the original occupancy requirement when you bought the home. You’re not allowed to purchase a property with VA financing intending to use it as a rental from the outset.

If you’re navigating a divorce and planning to move out, it’s a good idea to notify your loan servicer and keep records of any changes to your living situation, especially if the home will become a rental or be transferred.

Next Steps

Before making any major decisions about your home during a divorce, talk to your loan servicer or a VA-approved lender. They can explain your mortgage options, including assumption, refinancing, or selling the home.

You should also consult with your divorce attorney to make sure the mortgage and property are handled correctly in your divorce agreement. Clear communication on both the legal and financial fronts will help you avoid surprises down the road.

Reviewed for accuracy by Tim Lucas and The Military Wallet’s legal team.

Sources:

VA.gov – Rights of VA Loan Borrowers

VA.gov – The VA Loan Guaranty

VA Form 26-6381

VA.gov – Cash-out refinance loan

VA.gov – Interest rate reduction loan

Divorce Lending Association

Meet the Author

Deborah Kearns

Deborah Kearns is a freelance editor and writer with more than 15 years of experience covering real estate, mortgages and personal finance topics. Her work has appeared in The New York Times, Forbes...

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