“Is This Loan Assumable?” Is the Wrong Question

In a divorce, "Is this loan assumable?" sounds like the right question to ask about the mortgage. It usually gets an accurate answer to a question the case is not asking.

Here is an illustrative file in which nobody did anything wrong. The spouse keeping the house wants to keep the existing loan, because its rate is far below anything available today and a new loan at current rates would not fit her budget. Someone on the team calls the servicer and asks whether the loan is assumable. The answer is no. The note has a due-on-sale clause, as most conventional fixed-rate loans do. So the agreement is rewritten around a refinance, with a deadline she is unlikely to meet.

The servicer's answer was correct. It described what the note allows when a house is sold to a buyer. This house was not being sold to a buyer. It was moving between spouses under a divorce decree, which follows a different set of rules, and nobody asked about those.

Why the question gets the wrong answer

"Assumable" is a word from the world of home sales. Asked that way, it sends the person answering straight to the note, and the note answers whether a stranger can take over the loan. For most conventional loans, the answer is no.

A divorce is not a sale to a stranger. A transfer to a spouse under a decree is handled differently, and the rules that govern it are not written in the note. That is how a "no" can be accurate and still close a door the case never looked behind.

There is a second problem, and it applies even when the answer is yes. In a divorce, the word "assume" covers three different outcomes, and they do very different things for the two people involved.

One word, three outcomes

1. Title moves. She owns the house. He is still on the loan, and she is not. Nobody's liability has changed.
2. She takes on the loan, and he stays on it. Both of them are now liable. This is rarely what anyone wanted, and it can be accepted in the belief that the job is done.
3. She takes over the loan, and he is released. This is the only one of the three that takes him off the note, and it is what a divorce file is almost always asking for.

Most settlement agreements say "assume the mortgage" and stop there. Which of the three did yours describe?

The difference between the three is not paperwork. It decides whether the spouse who leaves can buy another home, whether one spouse's late payment shows up on the other's credit, and whether the family is still financially tied together years after the divorce is final.

Four questions that get a useful answer

Instead of asking whether the loan is assumable, ask the questions the case actually depends on.

1. What happens to title, and when? Who will own the house, and on what date does that change?
2. After the divorce, who is liable on this loan? One spouse, the other, or both. The answer should be stated, not assumed.
3. Who requests the release, and does the agreement say so? A release of liability does not happen on its own. It has to be asked for, and on a loan owned by Fannie Mae, the request comes from the borrower who is leaving, not from the spouse keeping the house. If the agreement assigns that step to no one, it often never happens, and the transfer is completed with nothing released.
4. Can the spouse keeping the house qualify on her own, and what happens if she cannot? A release depends on her qualifying alone. If she does not, the agreement needs a path for that before it is signed, not after.

What each answer changes in the case

If the answer is "title only," he still carries the debt. It stays on his credit report, every late payment is reported against him too, and his next lender will see a mortgage on a house he no longer owns.

If the answer is "assumption with release," the buyout, the timeline and his housing plan all look different. His next home can be planned without her loan attached to him, and she may keep a rate she could not replace.

If she may not qualify, that is a question for the draft, not for the months after the decree. The answer might be a longer timeline, a different buyout structure, a refinance, or a sale. Any of those can be right. What goes wrong is finding out after the agreement has already been signed.

Where a CDLP® fits

A Certified Divorce Lending Professional asks these questions while the agreement is still a draft. The CDLP® identifies the gaps in the settlement agreement that would close off the family's housing options, helps the team decide which of the three outcomes the agreement is actually describing, and builds a buyout strategy that is feasible, affordable and sustainable for the spouse keeping the home. The spouse who leaves is planned for too, because the second household needs a home of its own.

Every divorce is different, and there is no template that answers these questions for every case. When a new mortgage or a release is part of the plan, a CDLP® helps the drafting attorney arrive at terms that meet the clients' needs and hold up to underwriting review. In our experience, less than 20 percent of what a CDLP® does has anything to do with the mortgage itself.

The same thinking runs through a Divorce Mortgage Planning Report, which tests the housing plan while the agreement can still account for the answer. The research behind this article, including the new state assumption laws and what they do and do not do, is in The Divorce Assumption Report. A CDLP® in your market can be found in the CDLP® directory.

This article is general information for professionals, not legal advice, and it does not characterize what any decree should say. The release of liability pathway described applies to conventional loans sold to Fannie Mae or Freddie Mac. Government loans follow different rules.