How does divorce mortgage planning benefit divorcing military spouses? Working with a Certified Divorce Lending Professional (CDLP®), divorce mortgage planning can help identify strategic solutions for managing the existing VA Loan on the marital home.
VA loans are a great benefit to eligible veterans. That said, it is essential to understand that eligibility for VA financing is held for the veteran directly and qualified surviving spouses. So what happens when the marital home is awarded to one spouse during the divorce, where the property secures an existing VA home loan?
There are a few different options that can occur.
The non-veteran spouse retains the family home:
- When the non-veteran spouse is awarded the marital home and needs to refinance the existing mortgage and pay their former spouse their share of equity, the non-veteran spouse is not eligible for new VA financing since this is a benefit specific to the veteran. The non-veteran spouse must refinance the existing VA home loan using conventional financing. The most common roadblock with this situation is there is often times enough equity in the home to refinance with new conventional financing. When the home was purchased with VA home loan financing, it was most likely done with 100% financing. (Note: FHA refinancing may also be an option rather than conventional.)
- When the non-veteran spouse is awarded the marital home and is not required to refinance the existing mortgage, the veteran spouse will remain legally obligated for the loan. The divorce settlement may assign the responsibility of paying the existing mortgage payment to the non-veteran spouse; however, that will not alter the original agreement and obligation between the veteran spouse and the current mortgagor. Additionally, the veteran spouse's entitlement for obtaining the current VA financing will remain tied to the existing mortgage. Therefore, it may limit their ability to get another VA loan for purchasing a new home for themselves. Provided the veteran has enough second-tier entitlement remaining, they may be able to secure a second home utilizing their VA loan benefit.
When the veteran spouse retains the marital home, there are three ways to remove the ex-spouse from the existing VA mortgage:
- A new Equity Buy-Out refinance with new VA financing to pay the equity share to the former spouse can be obtained when necessary with the veteran applying for the mortgage directly.
- In the absence of the need to distribute any equity ownership in the property, an Interest Rate Reduction Refinance Loan (IRRRL) can remove the former spouse from the existing mortgage; however, there must be a minimum interest rate improvement of .5% to qualify.
- A Simple Release of Liability or Spousal Release may be possible provided that the veteran meets the existing mortgage holder's requirements, allowing the veteran to retain the current mortgage terms and time invested. A release of liability is a much simpler and more favorable solution than applying for a loan assumption. It's also important to note that if an equity buy-out is required, a new loan would need to be acquired or settled with other marital assets.
As of June 1, 2023, the Veterans Administration released an update to the VA Assumption process addressing the Simple Release of Liability or Spousal Release Process, making it much easier for the veteran to obtain the release of liability for their former spouse.
Previously, the Department of Veterans Affairs (VA) had been part of this process, but the servicer will now complete the entirety of the release of liability/spousal release.
Below is the verbiage from VA Circular 26-23-10 to aid servicers in the completion process:
e. Spousal Releases: VA does not require the servicer to complete an assumption to release a spouse, whose entitlement is not encumbered by the VA-guaranteed loan, from liability to a loan if the request is made due to a decree to dissolve the marriage or a legal separation agreement awarding the property to the Veteran whose entitlement is encumbered by the VA-guaranteed loan. The servicer may proceed with the spousal release and update VALERI with the obligors as appropriate, if the Veteran or ex-spouse provides the following documentation to the servicer:
(1) A copy of the decree to dissolve the marriage or legal separation agreement verifying the property was awarded to the Veteran whose entitlement is encumbered by the VA-guaranteed loan; and,
(2) A recorded copy of the legal document (ex. quit claim deed) transferring ownership to the Veteran whose entitlement is encumbered by the VA-guaranteed loan.
As a divorce mortgage planner, the CDLP® can help divorcing homeowners make a more informed decision regarding their home equity solutions while helping the professional divorce team identify any potential conflicts between the divorce settlement, home equity solutions as well as real property issues.
Divorce Mortgage Planning is the ability to put into play the desired outcome by pairing the needs and options available while helping to incorporate the necessary details and clarity into an executable settlement agreement to obtain closure and peace of mind successfully.
Working directly with the divorce team, a CDLP® incorporates divorce mortgage planning into the overall process with a unique and solid understanding of the intersection of family law, financing and tax planning, real property, and mortgage planning.
Involving a Certified Divorce Lending Professional (CDLP®) early in the divorce settlement process can help the divorcing homeowners set the stage for successful mortgage financing in the future.
This is for informational purposes only and not for the purpose of providing legal or tax advice. You should contact an attorney or tax professional to obtain legal and tax advice. Interest rates and fees are estimates provided for informational purposes only and are subject to market changes. This is not a commitment to lend. Rates change daily – call for current quotations.
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