Divorce is a complex and emotionally challenging process that can be difficult for anyone to navigate. In addition to figuring out the logistics of separating from your spouse, many have to adapt to changes in routines, schedules and, often, quality of life.
On top of that, military members and veterans must consider how a divorce will impact their current or future VA mortgage. Depending on your mortgage terms and personal preferences, you have several options for managing your VA loan following divorce.
Having a clear view of your options can help you make a well-informed decision you won’t regret later. Together, we will review common VA loans and divorce scenarios so that you can find the most beneficial solution.
Option 1: Consider Selling the Home
Many people feel a close emotional tie to the home they spent time in with their ex, while others may not be able to get rid of the house fast enough. Wherever you fall on that spectrum, one of your options is to sell your home and pay off your VA loan.
What was once an easy payment with two incomes may be a burden to cover alone. Can you afford to pay for the house all by yourself comfortably? By selling the home, you can divide the proceeds from the sale with your ex.
If you decide to sell, keep the costs that accompany the process in mind. Preparing a home for sale includes capital gains taxes, property transfer taxes, realtor fees, and potential renovation costs. Thankfully, there are steps you can take to save some money throughout the home-selling process.
Compared to other choices, selling the house is considered the easiest. However, you should be aware of your options regarding VA loans and divorce to ensure you make the right decision for you.
Option 2: Let Your Ex Assume the VA Loan
If your ex is determined to keep the home, you could allow them to assume the existing loan. This means that you would transfer the loan responsibility to your ex, making them accountable for the repayment terms and conditions of the mortgage.
Not just anyone can assume a VA loan, though! The assuming party must meet the financial VA loan requirements on their own. Moreover, they also have to be able to pay the VA home loan funding fee, which is 0.5% of the remaining loan balance. These terms can be roadblocks for someone hoping to assume a VA loan during a divorce. You can review the VA Loan Eligibility and Financing Rules for more in-depth information.
If you decide to let your ex assume your VA Loan, there are some steps you will need to take to secure your VA entitlement. These actions will ensure you can still use your VA benefit in the future.
How Divorce Affects Your VA Entitlement
Think about having your ex assume your VA loan as handing over your loan entitlement benefit. That is, until the loan is paid off in full.
If your ex-partner is a veteran, you can ask them to substitute their VA loan entitlement for yours, essentially freeing up your entitlement. If you decide to take this route, your local VA office can supply more details about the substitution of entitlement process.
Ex-spouses who are non-military don’t have the benefit of substituting their VA loan entitlement, but you may be able to restore yours by completing a VA release of liability.
Don’t Forget to Obtain a VA Release of Liability
Many falsely assume that their liability for the loan is automatically removed when they complete a loan assumption. However, releasing liability is a separate process you must complete in addition to the VA loan assumption process.
Obtaining a release of liability for a VA loan ensures that you are not financially responsible for the loan payments on the home you had with your ex-partner and may restore your entitlement.
To get started with a release of liability, contact the company you send mortgage payments to. Remember, if you don’t obtain a release of liability and your ex fails to make loan payments, it will impact your future VA loan benefits.
Option 3: Refinance the VA Loan
Does the idea of selling your home send you reeling? Would your ex prefer to refinance the home in just their name? If you and your former spouse’s names are both on the loan, there is the possibility of refinancing the loan in just your or your ex’s name.
Refinancing your ex off the loan would remove their name from the title, which means they would not benefit from the sale of the property in the future.
Likewise, you can refinance the loan in just your ex-partner’s name, taking away your financial responsibility for the property. Non-military ex-spouses would need to refinance the loan as a conventional loan as they don’t have access to VA benefits on their own.
There are pros and cons of refinancing a VA Loan worth considering. For example, you may want to consider the current interest rates as they may be significantly higher than when you first obtained your VA loan. Furthermore, things like current credit scores, outstanding debts, and income should all be taken into account before refinancing.
VA Loan Occupancy Rules and Divorce
It’s important for everyone involved to be aware of the VA loan occupancy rules. That is, whoever takes over a VA loan is required to use that home as a primary residence. This rule, among other VA loan requirements, may be essential in the decisions you make regarding your home during a divorce.
Whatever decision you make about the future of your home, it’s important to make sure it makes financial sense for both you and your ex. Making careful decisions regarding your VA Loan home will help you enter this new life chapter with peace of mind and future financial security.