Making Sense of FHA Loan Assumptions During Divorce

For the first time in decades, interest rates have hit record-breaking highs, more than doubling monthly mortgage payments. Consequently, many of today’s divorcing couples who have a favorable interest rate on an existing marital home may feel handcuffed. How can they see an optimistic path forward when it comes to securing affordable lending after a divorce? Loan assumptions are an increasingly popular solution.

Getting divorced is a difficult and stressful process on its own. Add in financial complexities like figuring out what to do with your jointly-owned home, and it can feel totally overwhelming. One option you may be considering is keeping the house yourself and assuming the mortgage. But what does that entail with an FHA loan?

In this comprehensive guide I’ll walk through everything you need to know about assuming an FHA mortgage in a divorce situation. I’ll explain how it works, the benefits it can offer, the qualification requirements and some key considerations to keep in mind.

My goal is to provide you with a clear understanding of FHA loan assumptions so you can determine if it’s the right path forward as you navigate this major life transition.

What Does It Mean to Assume an FHA Mortgage Loan?

Let’s start with the basics – what does it actually mean to assume a mortgage in a divorce context?

Assuming an FHA mortgage means taking over the full legal responsibility for making the remaining monthly mortgage payments. This involves formally transferring the liability from being jointly shared between you and your spouse to just you individually.

With an FHA loan assumption, you agree to abide by the original repayment terms, including the interest rate, loan balance, and other conditions stated in the mortgage contract. The lender must approve you to take over the loan by yourself.

Essentially, you are stepping into the shoes of the previous co-borrowers. This releases your spouse from the mortgage debt while you become solely accountable for paying the FHA loan moving forward.

Key Benefits of Assuming an FHA Mortgage in Divorce

There are some significant benefits that can make assuming an FHA mortgage an appealing option, especially if you hope to keep living in the home. Here are some of the top advantages:

You remain in the home: Assuming the FHA loan allows you to stay in the family house without disruption. This provides housing stability and continuity.
Avoid refinancing costs: Assuming the mortgage lets you skip refinancing costs like appraisal fees, application fees, and closing costs.
Keep favorable loan terms: If you have a low FHA interest rate or comfortable payment amount, you can maintain these by assuming the loan rather than getting a new mortgage.
Your spouse exits the mortgage: Removing your former partner from the loan can simplify the separation of financial obligations.
Build home equity: As you pay down the mortgage, you’ll accrue equity that belongs just to you.
Tax benefits: You may be eligible for mortgage interest and property tax deductions by assuming the FHA loan.

For many, these incentives make an FHA loan assumption worth exploring when dividing marital assets during divorce.

How Do I Qualify to Assume an FHA Mortgage?

While assuming an FHA loan can offer advantages, you must meet certain criteria for the lender to approve you taking over the mortgage solo. Here are some key qualification requirements:

Credit check: The lender will evaluate your credit score and history to assess if you are financially responsible enough to manage FHA mortgage payments on your own.
Income verification: You’ll need to provide proof of stable income, such as pay stubs, tax returns, or bank statements, to demonstrate you can afford the monthly payments.
Down payment: Some lenders require you to pay a certain percentage up front towards the mortgage principal before approving you to assume it.
Loan review: The lender will examine if the current FHA loan is still in good standing, with no late payments or other issues.
FHA guidelines: You must meet general FHA borrower requirements around employment, income sources, credit, and home value limits.
Assumption approval: Ultimately, the lender has full discretion over whether to allow you to assume the FHA mortgage. You need their formal approval.

Every lender has their own specific criteria for permitting FHA loan assumptions. Be sure you understand your lender’s qualification standards before deciding if assumption is feasible in your situation.

Step-by-Step Process for Assuming an FHA Mortgage

If you determine that assuming your FHA home loan is possible and desirable, here is an overview of what the process entails:

Review your divorce decree: Verify any clauses about retaining the home and FHA mortgage.
Contact the lender: Ask the lender if your loan can be assumed, their requirements, and the process.
Submit a loan application: Provide financial documents and pay for credit checks/appraisals required by the lender.
Get conditionally approved: The lender will evaluate if you preliminarily qualify based on your application.
Sign assumption agreement: This legally transfers liability for the FHA mortgage payments and terms to you.
Process paperwork and payments: Finalize any last documents, fees, and down payment required by the lender.
Formally exit old co-borrowers: Your spouse must be officially removed from the mortgage contract and related paperwork.
Update title and accounts: Change property title, insurance policies, tax records, etc. to reflect you as sole FHA mortgage holder.
Assumption finalized: Once the lender gives final approval, the FHA loan assumption is complete!

Some of these steps may vary depending on your lender and specific divorce decree situations. Be sure to stay in close contact with your lender throughout the process.

Costs and Fees for Assuming an FHA Mortgage

When weighing an FHA loan assumption, an important consideration is the costs and fees involved. Here are some expenses to anticipate:

Assumption fee: Most lenders charge a fee for processing the assumption, often between $100-$1000.
Credit check fee: You’ll likely pay the cost for the lender to pull your credit report and score.
Appraisal fee: The lender may require a new appraisal with you covering the cost (typically $400-$500).
Down payment: If the lender mandates a down payment before approving the assumption, this is an extra cost.
Legal fees: If you hire a real estate lawyer to assist with the assumption process and paperwork, there are added legal costs.
Recording fees: You may have to pay recording fees to file the assumption with local government authorities.
Title fees: Charges may apply for updating property title records to show you as the sole FHA mortgage holder.
Mortgage tax: Some states levy taxes when mortgage liability transfers, which you may need to pay.

Be sure to get an itemized estimate of all assumption fees and costs from your lender early on. Factor this into your total divorce settlement budget.

Key Considerations for FHA Loan Assumptions

Beyond just the assumption qualifications and process, there are some additional important considerations to factor into your decision:

Your credit: Assuming an FHA mortgage will impact your credit profile. Be sure your credit is strong enough to support this.
Loan eligibility: Monitor that you still meet general FHA loan requirements around income, debt levels, and credit.
Divorce decree: Ensure the assumption aligns with any clauses around the home and mortgage in your final divorce judgement.
Tax implications: Consult a tax expert to understand deductibility of mortgage interest and property taxes after the assumption.
Long-term plans: Weigh how assuming the FHA mortgage fits your larger personal finance goals and plans.
Alternatives: Also explore alternatives like refinancing or selling the home before deciding assumption is the best route.
Seeking advice: Talk to financial and legal professionals to ensure you make the most informed decision.

Taking the time to thoroughly evaluate these aspects will help you determine if assuming the FHA mortgage ultimately suits your needs during this divorce transition.

Alternatives to FHA Loan Assumption

While assuming the FHA mortgage is one possibility, here are a few other options that may be worth considering:

Refinancing in your name: You can refinance the home into a new mortgage under just your name. This removes your spouse from the loan. You’ll get a new interest rate and repayment term.
Selling the home: If you don’t want to keep the property, you and your spouse can sell the house and split proceeds. This provides you both with a clean financial break.
Buying out your spouse: You keep the home but pay your spouse for their share of the home equity to exit the mortgage.
Getting a roommate: Consider renting rooms out to help cover the mortgage payments if assuming the loan solo.
Using alternate assets: You may opt to sell or borrow against other assets to pay off the mortgage, then retain the home mortgage-free.

Look at your full financial situation and future plans when weighing these alternatives to an FHA loan assumption.

Questions to Ask Before Deciding on FHA Loan Assumption

Here are some key questions to get answered as you consider assuming your FHA home loan:

Is my FHA mortgage actually assumable?
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fha loan assumption divorce

What is an assumable mortgage?

An assumable mortgage is a type of loan that is transferable by the seller and assumable by the purchaser. The purchaser then becomes responsible for the loan through the mortgage assumption. In other words, it may be possible for one spouse to remain in the marital home and take over the existing mortgage on their own.

What makes a mortgage loan assumable?

It depends on the terms set by the lender. Look for relevant clauses in the existing mortgage note, deed of trust, security deeds or loan closing disclosures. There are two types of assumptions that may be possible:

Legal Transfer Assumption. In this case, the spouse taking over the loan does not need to prove that they can qualify for the mortgage by themselves. Although they will be legally responsible for paying the mortgage, their former partner is not released from liability—they are effectively in a secondary position, like a loan co-signer.
Qualified Assumption. In this case, the spouse taking over the loan must qualify for the mortgage on their own (adequate credit score, employment history, etc.), and their former partner is fully released from liability.

Typically, government-backed mortgages (FHA, VA, USDA) and Fannie Mae and Freddie Mac conventional mortgages are assumable. It is important to note that you cannot take out any home equity in a mortgage assumption.

Loan Assumption – What You Need To Know Before Assuming a Loan

FAQ

Are FHA loans assumable in divorce?

All FHA insured mortgages are assumable. However, FHA has placed certain restrictions on the assumability of FHA-insured mortgages originated since 1986. Depending on the date of loan origination, a creditworthiness review of the assumptor by the lender may be required.

How does a loan assumption work in divorce?

The assumption of a loan is one of the most popular methods. An assumption of a loan is when you take full responsibility for the debt. By assuming, the current mortgage will keep the current interest rate, and retain the current mortgage balance.

What are the requirements to assume an FHA loan?

An assumable FHA mortgage works in the same way, but a buyer will need to meet certain criteria before taking over an existing FHA mortgage. Among these criteria, a buyer will need a credit score of at least 580 and a debt-to-income ratio of 43% or less.

Is divorce considered a financial hardship?

Most commonly, spouses have to go from supporting one household to two and this is usually all you have to explain. Sometimes, there are additional costs for one of the parties resulting from the divorce (like child support or family law attorney’s fees) that can be mentioned as part of the financial hardship.

Are all mortgage loans automatically assumed in a divorce?

Not all mortgage loans can be automatically assumed in a divorce. Whether a loan is assumable or not depends on the terms set by the lender, your creditworthiness, and the type of loan. Here are some common types of assumable loans: FHA loans: Loans insured by the Federal Housing Administration are typically assumable.

What is an assumption of mortgage divorce?

An assumption of mortgage in a divorce is when one spouse takes over the existing mortgage on the marital home solely in their name.This involves legally transferring the responsibility for the mortgage

How much does it cost to assume a mortgage after divorce?

Oftentimes, an assumption can be completed by paying less than $1,000 in fees, if it can be completed at all. An assumption, if done correctly, accomplishes the goal of separating yourself completely from your existing joint mortgage. What are the misconceptions of attempting to assume a loan after divorce?

Should a spouse assume a home loan in a divorce?

There are several reasons why a spouse in a divorce would want to assume a home loan. If the current loan terms are favorable (primarily the interest rate), this can be an easy way to protect those favorable terms instead of refinancing, perhaps at a higher interest rate. In most cases, assumption fees are less than the overall cost of a refinance.