As family law attorneys, navigating divorce proceedings involving veterans often entails addressing complex issues related to their VA benefits, and their home loan benefit is no exception. The marital home holds significant emotional and financial value, necessitating a thorough understanding of VA loan intricacies. Here, we explore essential considerations for family law attorneys when guiding veteran clients through divorce proceedings involving VA loans.

Understanding VA Home Loans

VA loans, a critical benefit for service members, veterans, and eligible surviving spouses, offer favorable terms such as zero down payment and competitive interest rates. Familiarity with the nuances of VA loans is essential for effectively advising veteran clients during divorce proceedings.

Divorce and VA Loan Entitlement

VA entitlement refers to the guarantee provided by the Department of Veterans Affairs (VA) to eligible veterans for obtaining a home loan. This entitlement serves as a financial guarantee to lenders, promising to reimburse a portion of the loan in the event of default by the borrower.

Basic entitlement is the initial amount of guarantee offered to veterans, typically covering up to 25% of the loan amount or a maximum set by the VA. This basic entitlement allows veterans to secure a home loan without a down payment, making homeownership more accessible.

Bonus entitlement, or secondary entitlement, supplements the basic entitlement and allows veterans to secure additional home loan benefits beyond the initial guarantee. It comes into play when veterans are seeking to purchase higher-priced homes, or when their basic entitlement is still attached to an existing VA home loan on a home that will be retained. Bonus entitlement enables veterans to utilize their VA home loan benefits for multiple home purchases throughout their lifetime, provided they meet eligibility requirements.

In cases where a veteran is awarded a marital home, encumbered by a VA loan, a few crucial considerations arise:

1. VA Cash-Out Refinance: Facilitating a VA cash-out refinance allows the retaining spouse to buy out the departing spouse’s equity share, providing financial stability and equitable asset division. The VA requires there to be an existing lien on all properties in which a cash-out refinance is taking place. In the case of an equity buyout on a free and clear home, the VA considers the judgment of divorce the lien and will not require a lien to be recorded with the County. Also, in the eyes of the VA, the equity buyout is considered non-mortgage debt and is not subject to any anti-churning guidelines applied to mortgage debt in refinancing into a VA home loan.
2. Release of Liability or Spousal Release: The VA made a change to their assumption process in 2023 via VA Circular 26-23-10 which allows the mortgage servicer to release the departing spouse from a VA loan without having to go through the VA assumption process. A couple of documents are required, like the final judgment of divorce showing the veteran was awarded the home encumbered by the VA loan and a copy of the recorded deed transferring ownership to the veteran whose entitlement is encumbered by the VA loan. This is a HUGE change by the VA saving veterans a ton of time and aggravation of going through the, agonizingly slow, VA assumption process.
3. Interest Rate Reduction Refinance Loan (IRRRL): Exploring an IRRRL enables the transfer of VA loan entitlement to a non-borrowing veteran spouse, in the case of both spouses being veterans or active-duty service members simplifying post-divorce homeownership arrangements.

In cases where a non-veteran spouse is awarded a marital home, encumbered by a VA loan, a couple of considerations arise as well.

1. Conversion to FHA or Conventional Loan: To facilitate an equity buyout or to remove the spouse from financial liability, the non-veteran spouse can refinance using either of these loan programs. Conventional financing requires joint ownership of the subject property for the previous 12 months for the refinance not to be considered a cash-out refinance, and FHA does not. Why is this important? A conventional cash-out refinance will have a higher interest rate and access to less equity than a non-cash-out refinance will. A word from the wise, never alter the title to the marital home until after the divorce is final, especially if new home financing will be obtained by either party.

2. Simple Assumption: If the equity in the marital home has been equalized a different way and the veteran has been, or is going to be removed from title a simple assumption may be an option. If the non-veteran spouse would like to assume the responsibility for the existing mortgage, taxes, insurance, maintenance, and upkeep, the existing VA loan can stay in place by notifying the loan servicer of the divorce and providing them a copy of the final judgment of divorce. Notifying the loan servicer and giving them a copy of the decree, stops them from trying to execute the due on-sale clause of the mortgage due to a transfer of title. The non-veteran spouse is protected from this happening by the Garn-St. Germain Depository Institutions Act of 1982. In a simple assumption, the veteran’s entitlement remains attached to the retained home and cannot be restored until the loan is paid off. This and many other reasons are why bonus entitlement was created.

Other Considerations:

1. Michigan Property Tax Exemption: MCL 211.7b provides an exemption of real property tax for properties used and owned as the homestead of a disabled veteran or surviving spouse. If the non-veteran spouse is awarded the home, even if a simple assumption is used, the exemption will be removed, property taxes will start to be reassessed, and the current mortgage payment will change potentially resulting in a large payment shock for the retaining, non-veteran spouse.

2. Homeowners Insurance: As in all divorces where one of the spouses is retaining the home but is not the primary insured. If the insurance has not been updated, and the vacated spouse remains as the primary insured, coverage may be denied if a claim is made.

About the Author

Marc Edelstein is a collaboratively trained Certified Divorce Lending Professional (CDLP) located in Clarkston, Michigan. Marc works with the divorce team to facilitate a fair and well-coordinated approach to handling real estate and mortgage-related matters because what may be a legal option, may not be a mortgage option. Marc has been a mortgage lender for 23 years and a CDLP for the past 6 years. Marc can be reached at 248-379-6749 or by email at medelstein@rossmortgage.com