Council Post: A Closer Look At Assumable Mortgage Misconceptions In Divorce (2024)

FAQs

How does assuming a mortgage work in a divorce? ›

When one spouse is awarded the marital home and ownership is transferred solely to that spouse, leaving the current mortgage intact, the receiving spouse agrees to take sole responsibility for the mortgage payments through the assumption process.

Under the Garn-St. Germain Act, lenders may not enforce a due-on-sale clause if the property is transferred as a result of a divorce decree, legal separation agreement, or a property settlement agreement (even if the mortgage is in default).

To assume a loan, you must qualify with the lender. If the price of the house exceeds the remaining mortgage, you must remit a down payment worth the difference between the sale price and the mortgage. If the difference is substantial, the buyer may need to secure a second mortgage.

Most conventional mortgages — the most popular type of loan — are not assumable. They contain what's called a due-on-sale or due-on-transfer clause, which mandates the mortgage be paid in full whenever the original borrower sells the property or transfers the loan.

If you talk to the mortgage company and present them with your divorce decree and a quitclaim deed, many lenders will remove you and leave the loan in your ex's name only. This is true for many lenders, including loans underwritten by government organizations. This is known as a release.

Even if one person doesn't want to or can't pay the mortgage, both people are likely still on the hook for the debt. The lender can often come after either person for the full amount of the existing mortgage, no matter who is named on the mortgage.

The Garn-St. Germain Depository Institutions Act removed the interest rate ceiling for banks and thrifts, authorized them to make commercial loans, and gave the federal agencies the ability to approve bank acquisitions.

A rate-and-term refinance is a traditional refinancing option that allows you to change the interest rate and terms of your existing mortgage. By refinancing your mortgage, you can remove your spouse from the loan and become the sole borrower.

In community property states (which include Idaho, Nevada, Arizona and California), both FHA and VA loans require the consideration of both spouses' debt.

Mortgage assumption allows a buyer to take on the original loan balance at the original terms, but it doesn't account for any home equity the seller has built.

Are there closing costs when assuming a mortgage? ›

In many cases, the closing costs on an assumed mortgage are lower than they'd be on a conventional loan — an appraisal is typically not required, and the FHA, VA and USDA place caps on some fees for assumed loans.

You can check the loan documents to see whether assumptions are permitted. The loan document will typically state whether or not the loan is assumable under the "assumption clause." The terms may also appear under the "due on sale clause" if loan assumption isn't permitted.

The Drawbacks of Mortgage Assumption

In a simple assumption, the seller remains liable for the outstanding mortgage debt. If the buyer defaults on payments, both parties' credit scores are affected. This shared risk can strain the relationship between buyer and seller and lead to financial repercussions for both.

Transferring the existing mortgage to the spouse keeping the house might be the easiest way to settle the housing issue. Usually a lender will want copies of the divorce decree and a properly executed and filed quitclaim deed in order to transfer the mortgage. Taking over a mortgage is called a mortgage assumption.

You'll be asked to provide extensive documentation, much like you would when securing financing the traditional way. That's why it's important to have copies of pay stubs and W-2's ready ahead of time. Keep in mind that the average loan assumption takes anywhere from 45-90 days to complete.

Transferring the existing mortgage to the spouse keeping the house might be the easiest way to settle the housing issue. Usually a lender will want copies of the divorce decree and a properly executed and filed quitclaim deed in order to transfer the mortgage. Taking over a mortgage is called a mortgage assumption.

Does It Matter Whose Name Is on the Mortgage in a Divorce? While the name on the mortgage can influence who is responsible for the debt, it doesn't necessarily dictate how the property is divided.

An assumable mortgage allows a home buyer to not just move into the seller's former house but to step into the seller's loan, too. This means that the remaining balance, repayment schedule and rate will be taken over by the new owner.