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 a lower interest rate, remaining balance, and time paid in. But is it really that easy?

Understanding Assumable Mortgages

An assumable mortgage allows the loan to be transferred from one party to another while keeping the initial terms intact. However, not all mortgages are assumable. Typically, only FHA, VA, and USDA home loans can be assumed, while conventional loans are generally not.

Mortgage assumptions 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 must be taken to avoid triggering the due-on-sale clause of the existing mortgage note.

Deed, Decree, and Debt: Three Separate Issues

While the marital settlement agreement determines who retains ownership of the marital home or other real property after the divorce, 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 instruments. 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 notify the current mortgagor of the ownership transfer to avoid the acceleration of the mortgage due to a transfer of ownership when the party retaining the home is not obligated on the current mortgage note.

Note: If the vacating spouse wants to remain on the deed until their name is removed from the mortgage, their mortgage financing options may be limited. Consult a CDLP™ to determine any impact on the vacating spouse.

Garn-St Germain Depository Institutions Act of 1982

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 in cases such as transfers to a spouse or children, transfers at divorce or death, the granting of a leasehold interest of three years or less not containing an option to purchase, and transfers into a living trust where the borrower is a beneficiary.

Assumption and Release of Liability

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 keeps 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, it doesn’t 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 and goes into foreclosure, the lender may pursue the original borrower for a deficiency judgment to collect the debt.

The Importance of Knowledge and Expertise

A Certified Divorce Lending Professional (CDLP®) offers experience, value, insight, and contextual information to close the gap in negotiations. They help divorcing homeowners make more informed decisions regarding their home equity solutions and maintain the practical skills to apply their knowledge to specific divorce situations.

Incorporate Divorce Mortgage Planning Early

How are you incorporating Divorce Mortgage Planning into negotiating and settling your divorce cases involving real property? Divorce Mortgage Planning can help divorcing homeowners move 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.

Contact a CDLP®

It is always important to work with an experienced mortgage professional who specializes in working with divorcing clients. A Certified Divorce Lending Professional (CDLP®) can help answer questions and provide excellent advice. Please don’t hesitate to reach out directly for additional information.

Disclaimer

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.

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.