A mortgage loan guaranteed by the Department of Veterans Affairs (VA) is a valuable benefit for veterans. VA loans allow veterans to buy homes without down payments or paying for private mortgage insurance (PMI). While spouses cannot take advantage of a VA mortgage by themselves, they can contribute income and also be listed on the loan with an eligible veteran

What happens, though, if the veteran and the spouse divorce? Decisions will need to be made. An ex-spouse can only stay the home that’s financed with a VA loan as long as the veteran remains on the loan. That also means the veteran is liable if the loan doesn’t get repaid, which may be an issue for the divorcing couple. The veteran may be only eligible for one VA loan at a time, so if he or she allows the ex-spouse to stay in the VA-financed home, he or she will need to use other mortgage options to buy another home. Sometimes, there can be Entitlement left over which can be used. That is why a licensed mortgage broker can help you fully explore all your options.

Refinancing or selling are options

If the ex-spouse keeps the home and wants to get the veteran’s name off the loan, he or she will need to repay the VA loan in full, most likely by selling or refinancing the home. That will restore the veteran’s full benefit.

If the veteran stays in the home and wants the spouse off of the loan, he or she can use the VA refinance program, provided he or she has sufficient income to afford the home. The VA refinance program is a streamlined refinance which doesn’t require income documentation or a full credit report.

The divorcing couple could also sell the home and simply split the equity. The veteran would be able to use the VA loan program again to purchase another home.

Changes in income

Of course, divorce typically means there will be changes in income. Anytime your financial situation is altered, it can affect your ability to get a VA loan approved. If a two-income family is reduced to one income, it could become harder to meet the VA’s debt-to-income (DTI) ratio. Also, VA loans require a specific residual income, defined as the amount left over after the homeowner has paid his or her monthly bills. Sometimes called “discretionary income,” this requirement is unique to VA loans and varies by location and family size. For example, in Florida, the residual income requirement for a family of one is $441. For a family of five, it’s $1,039.

Paying alimony and/or child support will obviously reduce the veteran’s income, making it harder to meet DTI and residual income requirements. On the other hand, if the veteran is receiving alimony and/or child support, that can help meet those requirements. Mortgage lenders can’t require you to give them information about receiving alimony or child support, but if you willingly disclose this income, it can count toward qualifying for a VA loan. Different VA lenders handle this type of income differently, so you’ll need to work with your lender.

Talk to the experts

Divorce is a difficult and challenging process, and deciding what to do about your home makes it even more difficult. If you have a VA mortgage and are divorcing your spouse, contact the mortgage specialists at Embrace Home Loans. We can help you evaluate your options and work toward a resolution. Please call 407-733-6425 for more information.