With rising mortgage interest rates, many divorcing homeowners are asking, “Can I assume the existing mortgage?” By assuming the existing mortgage, they hope to eliminate the need to refinance while keeping their current mortgage terms. But is it really that simple?
Understanding Assumable Mortgages
An assumable mortgage allows a loan to be transferred from one party to another while keeping the initial terms in place. However, not all mortgages are assumable. Typically, only FHA, VA, and USDA home loans are assumable, while conventional loans are not.
Even with an assumable mortgage, the current lender must approve the new borrower’s creditworthiness and ability to repay the loan. It isn’t as simple as one party agreeing to take over the mortgage. When transferring ownership of the marital home to a non-borrowing spouse, specific steps are needed to avoid triggering the due-on-sale clause of the existing mortgage note.
The Deed, Decree, and Debt in Divorce
Although the marital settlement agreement may determine who retains ownership of the marital home or other real property after the divorce, the Deed, Decree, and Debt are three separate issues that need to be settled.
Transferring Ownership with the Deed
A property owner can transfer ownership using a Quitclaim Deed or another legal instrument. When both parties are co-mortgagees, no further action is typically needed if retaining the current mortgage. However, notifying the current lender about the ownership transfer is crucial to avoid accelerating the mortgage due to a transfer of ownership when the party retaining the home is not obligated on the current mortgage note.
If the vacating spouse wants to remain on the deed until their name is removed from the mortgage, it may limit their mortgage financing options. Consulting a Certified Divorce Lending Professional (CDLP®) can help determine any potential impact on the vacating spouse.
The Garn-St Germain Depository Institutions Act of 1982 protects consumers from mortgage lenders enforcing the due-on-sale clauses in their mortgage loan documents when the transfer of ownership includes transfers to a spouse, children of the borrower, transfers at divorce or death, and other specific conditions.
Assumption and Release of Liability
When one spouse is awarded the marital home and ownership is transferred solely to that spouse, they agree to take sole responsibility for the mortgage payments through the assumption process. This process allows the loan to remain intact at the same interest rate, terms, and balance. However, legally assuming responsibility for the mortgage does not automatically release the original borrower from liability.
In some cases, the lender may release the original borrower from their obligation on the promissory note, but often, the original borrower remains liable. If the new owner stops making mortgage payments, the lender may seek a deficiency judgment against the original borrower to collect the debt.
A simple letter including a copy of the Divorce Decree sent to the mortgage holder may suffice as notice to the servicer. Here’s a sample:
Loan No. 12345678
GARN-ST. GERMAIN ACT ASSUMPTION NOTICE
I am writing to inform you that, as of April 1, 2018, my husband and I were divorced by order of the Circuit Court of Henry County, Georgia. According to the divorce decree, Mr. Smith must transfer to me his entire interest in the marital residence located at 1234 Main Street. The transfer will take place on May 30, 2018. On that date, I am to assume the mortgage that encumbers the property and make the payments thereon.
Therefore, pursuant to the Garn-St. Germain Depository Institutions Act of 1982, I now notify you of my intent to assume the Mortgage and Note. Accordingly, you may begin mailing statements to me immediately. Thank you for your cooperation and understanding.
The Role of a CDLP® in Divorce Mortgage Planning
Involving a Certified Divorce Lending Professional (CDLP®) early in the divorce settlement process can provide a complete analysis of the mortgage financing requirements and their effects on both spouses. This essential step can help ensure a smooth transaction post-divorce and alleviate unnecessary burdens and frustrations.
A CDLP® can help divorcing homeowners make more informed decisions regarding their home equity solutions while identifying potential conflicts between the divorce settlement, home equity solutions, and real property issues.
Conclusion
Working with a Certified Divorce Lending Professional (CDLP®) and incorporating Divorce Mortgage Planning into the divorce settlement can help both spouses obtain new mortgage financing post-divorce. Contact a CDLP® today for a copy of the Divorcing Your Mortgage Homeowner Workbook. This guide will help you get organized, be prepared, and understand your mortgage financing position, whether you need to refinance the marital home in an Equity Buy-Out situation or prepare to sell and purchase a new home post-divorce.
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