A Simple Release of Liability Helps Divorcing Veterans Keep the Existing VA Loan Terms

A veteran is awarded the marital home. The decree is signed, the quitclaim deed is recorded, and the former spouse wants off the loan. The servicer says the only route is a full assumption, sends an application package, and the veteran is asked to requalify alone for the entire unpaid balance of a loan that was underwritten to two incomes.

Many veterans in that position will not qualify. The file stalls, the former spouse stays on the note, and a settlement that looked complete on the day it was signed quietly is not.

None of it was necessary. VA has said since May 2023 that where the veteran keeps the house, no assumption is required at all. The instruction is real, it is current, and almost nobody outside loan administration has read it, because VA published it to servicers rather than to veterans.

Start With the Direction the File Is Going

Almost everything written about VA loans in divorce assumes the veteran is leaving. In most files the veteran is staying. The two directions are governed differently, they cost differently, and they fail differently, so the first question on any VA file is which one you are in.

• The veteran keeps the house and the non-veteran spouse wants off the loan. This is the common case, and it is the easier one.
• The veteran leaves and someone else takes the house. This is the case with the lasting consequence, because the veteran's entitlement does not come back.

Both directions share one problem, and it causes most of the trouble in this area. What everyone calls release of liability is three separate acts, granted by different parties, and obtaining one does not produce the others: VA approval of an assumption, VA release of the veteran's liability to the Secretary, and release from the note itself, which only the holder can grant and no rule compels.

Where the Veteran Keeps the House, No Assumption Is Required

VBA Circular 26-23-10, issued May 22, 2023 and valid until rescinded, addresses this directly under the heading Spousal Releases.

The circular then names what the servicer needs, and it is two documents:

1. A copy of the decree to dissolve the marriage, or the legal separation agreement, awarding the property to the veteran.
2. A recorded copy of the legal document, a quitclaim deed for example, transferring ownership to the veteran.

That is the whole file. No assumption package. No creditworthiness determination. No VA approval, and no VA release letter. VA's own lender training states the same thing in one sentence: if the veteran is awarded the property, the transfer does not require VA approval, assumption, or a VA release letter. The servicer processes the spousal release and updates VALERI, VA's servicer reporting system, to show the corrected obligors.

How to Ask for It

Paragraph e is permissive as to the servicer. It says the servicer may proceed, so a servicer that has not read it will default to what it knows, which is the assumption package. The practical move is a written request to the servicer, enclosing the decree and the recorded deed, that cites Circular 26-23-10, paragraph e by number and by paragraph letter. Cite it that way every time. A general reference to the circular invites a general answer.

The full analysis. The rule underneath this article is VBA Circular 26-23-10, paragraph e. Where a decree awards the property to the veteran, VA does not require the servicer to complete an assumption in order to release the other spouse. A copy of the decree and a recorded deed, and that is the whole file. No underwriting, no VA approval, no VA release letter. Most servicers have never read it, and the ones who route the request as a full assumption instead force the veteran to requalify on the entire unpaid balance alone. We set out both directions of the transaction, the three separate acts that get bundled together under the phrase release of liability, and what happens to entitlement in each, in The Military Divorce Assumption Report. It is free and carries no form.

Three Things Paragraph E Does Not Do

This is where the point gets oversold, so it is worth being exact about the limits.

• It does not release the spouse from the note. Everything in this section is a release running to the government. Whether the departing spouse is off the promissory note, and therefore off the credit report and out of reach of a deficiency, is a separate act by the holder. Get it in writing.
• It does not work if the departing spouse is also a veteran whose entitlement is on the loan. Paragraph e is written for a spouse whose entitlement is not encumbered by the loan. Where both spouses are veterans and both entitlements were used, the parties are back to a full assumption with substitution of entitlement. Establish whose entitlement is actually charged, from the Certificate of Eligibility or the loan file, before assuming anything.
• It does not restore or free up anything for the veteran. The veteran keeps the house, keeps the loan, and keeps the entitlement charge against it. That is the correct outcome and it is not a loss, but it is worth saying plainly to a client who has been told that removing a former spouse will free up their VA benefit. It will not.

Why Being Routed as an Assumption Is the Risk

If the same request goes through the assumption machinery instead, the standard that applies is the one at 38 U.S.C. 3714(a)(1)(B)(ii): the person taking the property must qualify from a credit standpoint to the same extent as if the purchaser were a veteran eligible under section 3710 for a new loan in the amount of the entire unpaid balance. That is a full underwrite of one person, on one income, for the whole loan.

Under paragraph e that question never comes up. The difference between the two routes is not paperwork. It is whether the veteran has to prove something they may not be able to prove, in order to obtain a release VA does not require them to earn.

The Cost, and Why $300 Is Not the Number

Two things about cost are commonly gotten wrong, in opposite directions.

First, the funding fee. The VA loan assumption funding fee is 0.5 percent of the loan balance, but VA's own circular carves out the divorce case. Circular 26-23-10, Change 1, February 23, 2024, describes the permissible charges as including the VA funding fee unless the assumer is exempt, or the transaction is the result of an unrestricted transfer, such as an assumption processed as the result of a divorce. On a $400,000 balance that is $2,000 that should not be charged, and it is charged often enough to be worth checking every closing disclosure against that sentence.

Second, the processing fee. The regulation caps the holder's processing fee at the lesser of $300 and the actual cost of any credit report required, or $250 where VA prior approval is involved. In February 2024, VA authorized an additional regional charge on top of it, the Assumption Locality Variance: $463 in the West, $409 in the Northeast, $404 in the South and $386 in the Midwest.

If the Loan Has to Be Replaced

Where paragraph e is refused, or where the veteran needs cash out to fund a buyout, the file becomes a refinance. There are two routes and the rules are not intuitive.

An Interest Rate Reduction Refinance Loan can be used to leave the veteran alone on a new loan and drop the departing spouse. It cannot be used the other way. The regulation at 38 C.F.R. 36.4307(a)(2) requires that the veteran own the dwelling and either occupy it or have previously occupied it. Take the veteran off title and the predicate collapses.

And a streamline refinance is not credit underwritten at all. 38 C.F.R. 36.4340(a) exempts streamlined refinance loans from the VA credit standards by their express terms. So this route can remove a departing spouse without anyone ever testing whether the veteran can carry the payment alone, and it can leave a veteran solely liable on a payment that was underwritten to two incomes. Run the affordability question independently. Nobody else in the transaction is doing it.

A cash-out refinance, the route that actually produces buyout money, carries an occupancy requirement with no back door. 38 C.F.R. 36.4306(d) requires the property to be owned and occupied by the veteran as a home. Unlike the streamline provision, there is no previously-occupied alternative. An order or agreement giving the other spouse exclusive occupancy through the school year, or excluding the veteran from the residence pendente lite, can quietly remove the only refinance path that funds the settlement. The dates need to be sequenced against each other.

The Other Direction: the Entitlement Does Not Come Back

Where the veteran leaves and a non-veteran former spouse takes the house, the veteran can be released from liability and still not get their benefit back. Entitlement is restored only where the person assuming is a veteran who consents to substitute their own entitlement, under 38 U.S.C. 3702(b)(2). In the ordinary divorce, where the ex-spouse taking the house is not a veteran, none of that is available. VA states the consequence in one sentence: the original veteran's entitlement remains encumbered by the loan until the loan is paid in full.

Two different forms, signed by two different people, separate cleanly here and settlements often do not. VA Form 26-6381 is the departing veteran's application for assumption approval and release from personal liability to the government. VA Form 26-8106 is the statement of a veteran assuming the loan and substituting entitlement, and it is the only route to restoring the departing veteran's entitlement. Filing the first without the second is exactly how the trap springs.

There is also a disclosure worth asking about by number. VA Form 26-10291, the Assumption Entitlement Acknowledgement, was created in April 2024 to be signed by the veteran seller, because in VA's words veterans may not fully understand how an assumption may impact their available VA home loan guaranty entitlement. If a veteran client has already completed an assumption and did not sign one, that is worth knowing.

When the Servicer Will Not Move

In December 2023, VA issued a circular addressed specifically to holders refusing or slow-walking assumptions. Circular 26-23-27 sets a seven calendar day escalation. If VA is not satisfied the holder is moving, or if at any point VA concludes the delay may cause irreparable harm to the veteran, VA inserts a notation in the loan file that it will pay no guaranty claim, and notifies Ginnie Mae that the guaranty payable on the loan has been effectively reduced to zero. It is restored when the assumption completes.

A servicer that will not move on an assumption is usually not refusing on the merits. It is under-resourced and the file is not urgent. That circular is what makes it urgent.

What to Establish, In Order

This is the lending side of the file. It is not drafting advice and it is not legal advice. It is the sequence a Certified Divorce Lending Professional works through, offered so that the questions can be asked while the agreement is still a draft.

1. Confirm whose entitlement is on the loan. If the departing spouse is not a veteran with entitlement charged, paragraph e is available and the shorter path is open.
2. Write to the servicer citing Circular 26-23-10, paragraph e, enclosing the decree and the recorded deed. Ask for a spousal release, not an assumption.
3. Ask separately, in writing, for the holder's release of the departing spouse from the note. Paragraph e does not do this, and no rule compels it.
4. Confirm independently that the veteran can carry the payment alone, because on this route nobody else will check.
5. Confirm the funding fee is not being charged, and that the processing fee and locality variance are the only fees on the statement.
6. If a refinance is needed, sequence it against occupancy before any date goes into the agreement.

None of this requires a family law professional to become a lender. It requires knowing that these questions have documented answers, and getting them while the terms can still change.

The full analysis, in both directions, with the statutes, regulations and circulars quoted and linked, is in The Military Divorce Assumption Report. It is free to read, carries no form, and is free to quote unaltered with attribution.