Deciphering the VA Lender’s Handbook Chapter 5 Part 9
In the last article, we talked mostly about loan assumptions that take place without approval from the loan servicer or the VA. These situations can be complicated at best and devastating at worst. However, VA loans dated prior to March 1, 1988, could have been transferred without the VA’s prior approval (this rule has changed recently). There may be a situation where an unapproved assumption took place and there are no penalties imposed on the seller or buyer. However, in these cases, the seller and buyer might want to apply for a release of liability after closing the transfer. This article will outline how to handle release of liability, in this case, as well as handling the release of liability in case of divorce.
The process for handling release of liability requests depends on whether the servicer or holder have automatic authority. If the servicer has automatic authority, they are obligated to process the release of liability when the seller and buyer specifically apply for one. If a servicer does not have automatic authority, they are required to advise the holder of the loan with the request, and the holder will be responsible for approving the release – if the holder has automatic authority. If the holder also does not have automatic authority, then the servicer takes the application and the complete credit package to the VA to determine the creditworthiness of the purchaser. Just like with processing other changes to a loan commitment, there may likely be a processing charge just for reviewing the request. Additionally, if a current VA borrower “…sells his or her home to transfer ownership without requesting a release of liability, the servicer may charge up to $50 for amending its records to reflect a change in ownership, if the parties involved agree and it is permissible under the loan agreement.”
The great thing about requesting a release of liability for loans originally closed before March 1, 1988, is that there is no charge for the VA funding fee to the borrower when the release of liability is processed. However, if a loan that was originally closed on after March 1, 1988, has a release of liability applied for, the VA will charge the funding fee. The funding fee is something the borrower would have paid at the time of the assumption if it had been done with the proper approval, and it is one of the main reasons that the VA insists on VA borrowers getting proper approval before conducting an assumption. But an unauthorized transfer of a loan is not the only reason one might apply for a release of liability. What about in the case of a divorce?
There are generally two possible outcomes in the case of a divorce: either the veteran acquires the home as a result of the divorce proceedings or the veteran’s spouse does. In either case, it is typical and appropriate for the spouse that did not acquire the home to seek to be released from liability of the loan. This generally only happens when the spouses were jointly liable on the loan. Releases of liability for divorce reasons are handled in the same basic way as the other release of liability procedures. The same processing charge can be assessed in order to conduct the release of liability, but in the case of a divorce release of liability, generally no funding fee can be assessed on the new sole borrower. There are also several requirements that must be met before a release of liability due to a divorce can be processed.
First, the divorce must be final and absolute, and it has been determined that no appeal will be taken. Second, the entire estate being financed with the VA loan has become vested in the name of the veteran’s former spouse, and third, there is no property settlement that could legally make the veteran liable between the parties pay the guaranteed loan. In the case that the veteran borrower retains the home and the ex-spouse is to be removed, the release of liability should be referred to the local VA RLC. The servicer can still charge up to $50 for amending its records to reflect the change in ownership.