Can one spouse assume the mortgage releasing the ex-spouse from future liability?
With rising mortgage interest rates, many divorcing homeowners ask, “Can I assume the existing mortgage?” By assuming the existing mortgage post divorce, one spouse hopes to eliminate the need to refinance while keeping the current mortgage terms including lower interest rate, remaining balance, and time paid in.
If only it were this easy!
An assumable mortgage is a loan that can be transferred from one party to another with the initial terms remaining in place. Not all mortgages are assumable. In most cases, the only assumable mortgages are FHA, VA, and USDA home loans. Conventional loans are not typically assumable.
Mortgage assumptions still require the current lender to approve the new borrower’s creditworthiness and ability to repay the mortgage. 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, steps are needed to avoid an acceleration of the due on sale clause of the existing mortgage note.
Although the marital settlement agreement may determine who retains ownership of the marital home or other real property after the divorce is final, it is crucial to understand that the Deed, Decree, and Debt are three separate issues to settle.
The Deed and Transferring Ownership
A property owner can transfer their ownership of the real property to another party using a Quitclaim Deed
or other instrument. When both parties are co-mortgagees on the mortgage note, no further action is typically needed when retaining the current mortgage.
However, it is essential to take action and notify the current mortgagor of the ownership transfer to avoid an acceleration of the mortgage due to a transfer of ownership when the party retaining the home is not obligated on the current mortgage note.
A word of caution; if the vacating spouse wants to remain on the deed to the real property until their name is removed from the mortgage, the mortgage financing options available to the vacating spouse may be limited. Please refer to a CDLP™ to determine any impact on the vacating spouse.
The Garn-St Germain Depository Institutes 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, or children of the borrower, transfers at divorce or death, the granting of a leasehold interest of three years or less not containing an option to purchase and the transfer into an inter vivos trust (or a living trust) where the borrower is a beneficiary.
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. A loan assumption allows a transfer of ownership and leaves the loan intact at the same interest rate, loan terms, and balance. However, legally assuming responsibility for paying the existing mortgage is often confused with loan assumption, where the original mortgagee is released from further liability.
Assumption & Release of Liability
When a former spouse assumes ownership of the home and the mortgage, this does not always mean the mortgage lender will release the original borrower from their financial obligation or liability. A loan assumption is a transaction in which a person (the “assumptor”) obtains an ownership interest in real property from another person and accepts responsibility for the terms, payments, and obligations of that other person’s mortgage loan. The assumptor is liable for the outstanding debts, and unless a release of liability is requested, the original borrower will also remain liable.
In some assumptions, the lender may release the original borrower from their obligation on the promissory note. However, in most cases, the original borrower remains liable on the mortgage note. This means that, depending on state law and the circumstances of the particular case, if the new owner stops making mortgage payments in the future and goes into foreclosure, the lender may come after the original borrower for a deficiency judgment to collect the debt.
Does knowledge make a difference? Simple answer: Yes!
A CDLP™ offers experience, value, insight, and contextual information to close the gap in negotiations.
A CDLP™ possesses the knowledge to help divorcing homeowners make more informed decisions regarding their home equity solutions.
A CDLP™ maintains the practical skills to apply their knowledge to specific situations involving divorce.
How are you incorporating Divorce Mortgage Planning into negotiating and settling your divorce cases where real property is involved? Divorce Mortgage Planning can help divorcing homeowners get from where they are now to where they want to be by exploring and evaluating their strategic opportunities.
Involve a CDLP™ early in the settlement process for collaborative
problem-solving, leading to better outcomes.
Knowledge is a game changer.
This is for informational purposes only and not for the purpose of providing legal or tax advice. You should contact an attorney or tax professional to obtain legal and tax advice. Interest rates and fees are estimates provided for informational purposes only, and are subject to market changes. This is not a commitment to lend. Rates change daily - call for current quotations. The information contained in this newsletter has been prepared by, or purchased from, an independent third party and is distributed for consumer education purposes.
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