Everything You Need to Know About Mortgage Loan Assumption During Divorce

Going through a divorce is difficult enough without having to worry about what will happen to the marital home and the mortgage loan. For many couples the family house is their biggest asset so making decisions about it is often one of the most complex parts of finalizing a divorce settlement.

One option that you and your spouse may consider is having one partner take over or “assume” the existing mortgage loan Mortgage loan assumption allows one spouse to take on full legal responsibility for the home loan, removing the other spouse’s name and liability

In this comprehensive guide, we’ll provide an in-depth look at mortgage assumption during divorce, including:

• What is mortgage assumption and how does it work?
• The pros and cons of assuming a mortgage loan
• Requirements and qualifications for assuming a mortgage
• The step-by-step process
• Types of loans that can be assumed
• Alternatives like refinancing or selling the home
• And more…

Let’s get started!

What Is Mortgage Loan Assumption During Divorce?

Mortgage assumption simply means taking over the responsibility of an existing home loan solely in your name. It involves legally transferring the mortgage liability from being jointly owned by you and your spouse to just one of you.

With a mortgage assumption, you essentially inherit the original loan “as is.” This means you take on the remainder of the mortgage balance, keeping the same interest rate, monthly payments, and other terms that were agreed to when the loan originated.

Assuming a mortgage loan requires approval from the lender. They will evaluate if you can manage the financial obligation on your own by looking at factors like your income, debts, and credit score.

Mortgage assumption can be an attractive option in a divorce if you wish to keep the home but also want to:

• Remove your ex-spouse from the mortgage liability
• Maintain favorable interest rates or loan terms
• Avoid costs and fees that can come with refinancing

However, it also comes with downsides like becoming solely responsible for the remaining mortgage debt. We’ll explore the pros and cons next.

The Benefits of Assuming a Mortgage in Divorce

Here are some of the biggest advantages of mortgage assumption for the spouse taking over the home loan:

• Cuts ties with your ex financially: Taking over the mortgage yourself severs the financial dependence and liability with your former partner. They are no longer responsible for the loan.

• May avoid closing costs: Assuming an existing mortgage can help you avoid paying closing costs that come with refinancing. Closing costs can be 2-5% of the total loan amount.

• Locks in lower interest rates: If your current mortgage has a favorable rate, assumption allows you to keep it instead of getting stuck with higher interest rates when refinancing.

• Maintains comfortable payments: Along with keeping the interest rate, you can also retain the same monthly payment you’re used to, which provides financial stability.

• Gains control over the property: As the sole borrower, you have full authority to decide when to sell, refinance or borrow against the home equity without involving your ex.

• Simplifies ownership: Taking over the mortgage solo makes you the sole owner, allowing you to rebuild equity and credit on your own.

As you can see, mortgage assumption offers several financial and legal incentives during a divorce if you intend to keep the home.

The Potential Drawbacks of Mortgage Assumption

However, there are also some downsides to think through before assuming a mortgage:

• You become solely liable for the debt: This is a major risk. If you default, it damages only your credit, and foreclosure proceedings would be against you alone.

• May need to refinance eventually: Even if rates are low now, you may want to refinance later for things like a lower payment. Refinancing after assumption may be tougher.

• Limited flexibility: The set loan terms may limit you from making changes you’d like to the payment schedule, loan amount, etc.

• Contingent on lender approval: The lender has to approve you taking over the mortgage based on your finances and credit. There’s a chance you may not qualify.

• Ex-spouse may still owe “equalization”: In some cases, your ex may need to be compensated for their share of equity through an equalization payment.

Assessing the pros and cons allows you to make an informed decision based on your personal financial situation and goals.

What Are the Requirements to Assume a Mortgage?

Assuming a mortgage loan isn’t as simple as deciding you want to take over the payments. Lenders have specific requirements and processes borrowers must meet for a loan assumption to be approved:

Lender consent – The current mortgage lender must agree to releasing your spouse and letting you take over sole responsibility. Not all mortgages can be assumed.

Credit check – Lenders will thoroughly evaluate your credit report, score, and history to assess if you are financially dependable.

Proof of income – You’ll need to provide evidence of stable income through recent pay stubs, tax returns, and other documentation.

Debt-to-income evaluation – Lenders determine if your current debts plus the mortgage are affordable based on your gross monthly income.

Assumption agreement – If approved, you sign a legally binding contract making you liable for the remainder of the mortgage.

Potential assumption fees – There may be fees involved depending on factors like the lender and loan type. This ranges from $500-$1500+ in most cases.

Other costs – Appraisal or application fees may also apply depending on your situation.

As you can see, the lender essentially re-qualifies you for the remainder of the mortgage. You must prove you are financially capable of managing the loan solo.

Step-by-Step Process for Assumption During Divorce

If you and your lender determine mortgage assumption is possible, here is an overview of what to expect:

1. Review the divorce decree terms regarding the house and mortgage to understand any stipulations.

2. Contact the mortgage lender to ask about assumption possibility, requirements, and fees specific to your loan.

3. Undergo credit evaluation by providing a current credit report and evidence of income/assets.

4. Provide financial verification documents including tax returns, bank statements, etc.

5. Negotiate the assumption terms if you meet the lender’s benchmarks. This details the loan specifics you’ll be taking over.

6. Sign the assumption agreement to make it legally binding.

7. Pay any assumption fees.

8. Record the assumption by altering the deed, title, etc. to show you as the sole borrower.

9. Change insurance, tax, and utilities to your name only.

10. Finalize the process once the lender confirms everything is complete.

Having a real estate attorney assist you through the paperwork can help ensure it’s done properly.

What Types of Mortgage Loans Can Be Assumed?

You have the best chance of assuming these types of mortgages:

• FHA loans – Insured by the Federal Housing Administration

• VA loans – Guaranteed by the Department of Veterans Affairs

• USDA loans – Backed by the U.S. Department of Agriculture

• Conventional loans – Depends on your lender’s policies. The Garn St. Germain Act provides some exceptions for divorce.

• ARMs – Adjustable-rate mortgages. But interest rate changes over time should be considered.

Always verify with both your divorce decree and the mortgage lender first to confirm if assumption is possible. Requirements can vary loan to loan.

Alternatives to Mortgage Assumption in Divorce

While assumption can be a good choice, it’s not your only option. Here are some other possibilities to discuss with professionals and your ex:

Refinancing – Taking out a new loan in just your name. This may change the interest rate, payments, etc.

Home equity loan – Using equity to buy out your spouse’s share. Adds another monthly bill.

Selling the home – Splitting the sale proceeds may allow both parties to move on.

Buying another property – If affordable, one or both spouses can look to purchase separately.

Mortgage buyout – Paying your ex their equity share. May involve a loan assumption.

Evaluate alternatives to decide if mortgage assumption or another approach better aligns with your goals.

Key Financial Factors to Consider

Making an informed decision involves evaluating the financial impact mortgage assumption could have:

• How will taking on the full mortgage solo affect your credit and debt-to-income ratio?

• Can you afford the monthly payments as well as homeowner insurance, taxes, and maintenance costs?

• Will you need to refinance later and how might future interest rates impact that?

• Do you understand the tax implications of