Navigating Loan Assumption After Divorce: A Comprehensive Guide

Going through a divorce is difficult enough without having to worry about what will happen to jointly-held assets like your home and mortgage. For many couples, the family home represents their single largest asset. Determining what to do with it after divorce can have major financial implications for both spouses.

One option to consider is a loan assumption. With a loan assumption, one spouse takes over the mortgage, assuming full legal responsibility for the loan. The other spouse is released from the loan obligation. This allows the assuming spouse to remain in the home without requiring refinancing.

Loan assumptions can be an attractive option, but they are not always possible or advisable. Here is a comprehensive guide to loan assumptions after divorce, including how they work, requirements, pros and cons, and alternatives.

What is a Loan Assumption?

A loan assumption allows one spouse (the assuming spouse) to take over the existing mortgage on a home removing the other spouse from the loan. The original loan terms remain the same – nothing about the loan changes except legal responsibility for repayment.

With a loan assumption

• The assuming spouse becomes solely liable for repaying the mortgage. Their name alone goes on the loan.

• The non-assuming spouse is released from the loan. Their credit is no longer tied to the mortgage.

• The interest rate, monthly payments, loan balance and other terms stay the same. There is no loan refinancing.

Essentially, a loan assumption transfers legal obligation for the mortgage from both spouses jointly to one spouse individually. The assuming spouse inherits the original loan with all its terms intact.

Why Pursue a Loan Assumption After Divorce?

There are several reasons why a loan assumption after divorce might be desirable:

1. Maintain the mortgage terms. With an assumption, you keep your existing mortgage interest rate and terms, rather than getting a new loan with potentially less favorable terms. This can mean significant interest savings over the long run.

2. Avoid refinancing costs. Assuming a loan allows you to avoid the closing costs and fees that come with refinancing, which can tally $3,000-$6,000.

3. Simplify the process. In some cases, a loan assumption can be faster and easier than refinancing, especially if you have a cooperative lender.

4. Protect credit. Removing the other spouse from the mortgage also removes the risk of them damaging your credit if they miss payments.

5. Expedite the divorce. Agreeing to a loan assumption can sometimes help move a divorce settlement along when spouses are at an impasse over the house.

For the right situation, a loan assumption offers a convenient way to take over the mortgage without added expense or changes to the loan.

How Does the Loan Assumption Process Work?

If you decide a loan assumption is the right move after your divorce, here is an overview of how the process typically works:

• Review the divorce decree. Your divorce decree should specify how the home and mortgage are being divided. This serves as the legal basis for the assumption.

• Check loan assumptions are allowed. Your lender must first confirm that your loan type can be assumed. FHA and VA loans generally allow assumptions, but many conventional loans do not.

• Submit a loan assumption request. Work with your lender to submit a formal request to assume the mortgage. Be prepared to pay an assumption fee.

• Provide financial documentation. To qualify for the assumption, you’ll need to provide proof of income, assets and credit health demonstrating you can afford the mortgage solo.

• Obtain lender approval. The lender will review your application and make a final decision whether to approve the assumption.

• Sign assumption agreement. Once approved, you’ll sign an assumption agreement taking over legal responsibility for the mortgage.

• Record paperwork. The lender will file paperwork recording the assumption and releasing your ex-spouse from the loan.

• Change title. Finally, you must change the home’s title to reflect that you now have sole ownership.

The timeline varies by lender but expect the process to take 1-2 months on average.

What Are the Requirements to Qualify for Assumption?

Since you are taking over the mortgage solo, lenders want to ensure you can afford the loan on your own before approving an assumption. Common requirements include:

• Creditworthiness. Most lenders will run your credit and require a minimum credit score, often around 620.

• Income. You must document stable income that’s sufficient to make the existing monthly payments. Alimony may count as qualifying income.

• Down payment. Some lenders require you to pay down a portion of the mortgage balance as a condition of approval.

• Loan-to-value ratio. Your loan balance after the divorce can’t exceed a maximum percentage of the home’s value, usually 80%.

• Home appraisal. Expect the lender to order a home appraisal to confirm the current value if you haven’t had a recent appraisal.

Meeting these requirements demonstrates that you can handle the loan solo. Your lender may impose additional criteria so be sure to consult with them.

What Are the Pros of Pursuing a Loan Assumption?

If available and approved, a loan assumption offers these advantages:

• Lower costs. You avoid expenses of refinancing, which can reach into the thousands. Assumption fees are often under $1,000.

• Faster process. Assumptions can sometimes be processed faster than refinancing, taking 1-2 months versus 1-3 months.

• Retain better rates/terms. You keep your existing loan terms rather than getting a new mortgage with potentially higher interest rates or costs.

• Limited credit impact. An assumption won’t require a hard credit check or additional inquiry like a refinance, minimizing the credit impact.

• Easier qualification. Lenders may only require minimal documentation for an assumption compared to a full approval process when refinancing.

• Less home value impact. Assuming the loan rather than refinancing means you avoid another “cash-out” mortgage that could affect your home value.

For the right situation, a loan assumption can be a faster, easier and cheaper way to take over the mortgage after divorce compared to refinancing.

What Are the Cons of Pursuing a Loan Assumption?

While loan assumptions offer advantages, there are also some potential drawbacks to consider:

• Limited availability. Most conventional loans and some government loans cannot be assumed. You are limited to assumable loan types.

• Strict requirements. You must prove you can afford the full mortgage payment yourself, which may be difficult coming off a dual income.

• No term changes. The original term remains so you cannot extend the repayment period like with a refinance.

• Rising rates. If rates were higher when you originally bought your home, assuming that loan may mean higher long-term costs than refinancing at current lower rates.

• Inability to cash-out. An assumption does not allow you to take any equity out of the home as cash.

• Complex process. Assumptions can still be complicated, requiring substantial paperwork and strict approval.

• Ex-spouse still on title. In some cases your ex may remain on the home title even after being removed from the mortgage.

Depending on your goals and situation, these potential downsides may make refinancing a better avenue than pursuing a loan assumption.

What Are Some Alternatives to Loan Assumption?

If a loan assumption ends up not being feasible or advisable, here are a few other options for dealing with your mortgage after divorce:

Refinance in your own name – Taking out a new loan in your name alone is the most thorough way to remove your ex-spouse and obtain a fresh start. But refinancing also means potentially higher costs and interest rates.

Sell the home – If affordable housing is your priority, selling the existing home and downsizing to a lower-priced property may be the best financial move to provide long-term stability.

Convert to rentals – Rather than selling, another option is to convert the jointly-owned home into investment rental property. You become co-landlords and split rental income.

Buyout ex’s share – If you want to keep the home, you can take over the full mortgage while refinancing or taking a loan to buy out your ex’s share of the home equity.

Keep joint mortgage – In rare cases, you may opt to temporarily maintain joint ownership of the home and mortgage out of necessity. But this comes with substantial risk exposure.

Consult with real estate and legal professionals to identify your most appropriate post-divorce housing and mortgage solutions beyond just loan assumption. There are always multiple options to consider.

Expert Tips for Pursuing a Loan Assumption

If you determine that assuming your mortgage is the right decision after weighing all alternatives, keep these tips in mind:

• Speak with your lender early about assumption eligibility and requirements to avoid surprises down the line.

• Refinance first if interest rates are significantly lower now than when you got your original mortgage.

• Be conservative when budget