Mortgage Assumption in Divorce
When one member of a divorcing couple wants to keep the marital home, assuming the mortgage can be an option. If it's an option you’re considering, however, you should know about the potential challenges and hurdles that come with mortgage assumption.
What is a mortgage assumption?
A mortgage assumption occurs when a borrower transfers their existing mortgage loan to another person. That person then becomes responsible for the remaining balance, interest rate, and repayment terms.
The new borrower "assumes" the mortgage, stepping into the shoes of the original borrower.
In the case of divorce, one spouse may choose to assume the mortgage payments so they can keep the marital home. At the same time, the other spouse is released from their financial liability.
Why would a couple do this?
There are several reasons why a couple might consider mortgage assumption during a divorce:
- Maintaining stability: Divorce can be an emotionally challenging time, especially for children. If one spouse assumes the mortgage and keeps the home, it can provide everyone involved with a sense of stability and continuity.
- Avoiding the costs of selling: With closing costs, real estate agent fees, and potential repairs or updates needed to make the property more attractive to buyers, selling a home can be expensive. Mortgage assumption can help minimize these expenses and simplify the process of dividing assets.
- Preserving credit scores: When a couple divorces, their joint credit history may be negatively impacted. By assuming the mortgage, the spouse who keeps the home can continue to build their credit history while the other spouse can work on rebuilding their individual credit.
- Faster and easier process: Mortgage assumption can be a quicker and more straightforward process than refinancing or selling the property. It may be particularly beneficial in cases where time is of the essence, such as if one spouse needs to relocate for work or other reasons.
It's important to note that not all mortgages are assumable. If you’re considering this option, it’s essential to review the terms of your mortgage contract first. The spouse who wishes to assume the mortgage must typically qualify for the loan based on their income, credit score, and debt-to-income ratio.
Steps to assuming a mortgage during divorce
Assuming a mortgage during a divorce can be a complex process involving multiple steps. Here's an overview of the steps you need to follow:
Review mortgage terms
The first step is to review your current mortgage agreement to determine if it's assumable. Some mortgages, especially those backed by the Federal Housing Administration (FHA) or Department of Veterans Affairs (VA), are assumable. However, conventional loans may not allow for assumption.
Consult with professionals
Speak with a financial advisor, attorney, or mortgage professional to discuss whether mortgage assumption is the best option for you and your spouse. They can help you weigh the pros and cons and guide you through the process.
Determine your eligibility
The spouse who wishes to assume the mortgage must qualify for the loan based on their income, credit score, and debt-to-income ratio. They may need to provide documentation such as pay stubs, tax returns, and bank statements to prove their financial stability.
Obtain lender approval
Contact your mortgage lender to inform them of your intention to assume the mortgage. They will provide you with the necessary paperwork and guide you through their specific requirements. Keep in mind that the lender has the right to approve or deny the mortgage assumption based on the assuming spouse's financial qualifications.
Negotiate the terms of the divorce agreement
Work to draft a divorce settlement agreement that outlines the terms of the mortgage assumption, including the division of any home equity, responsibility for property taxes and insurance, and other relevant details.
Complete the assumption process
Once the lender approves the assumption, they will provide you with an assumption agreement, which both spouses need to sign. This document will legally transfer the mortgage obligations from one spouse to the other.
Update the property title
It's essential to update the property title to reflect the change in ownership. This process may involve working with a title company or an attorney to remove the non-assuming spouse's name from the title and make sure the assuming spouse has sole ownership of the property.
Finalize the divorce
After completing the mortgage assumption process and updating the property title, you can proceed with finalizing your divorce. Make sure the divorce decree clearly states the terms of the new mortgage, mortgage assumption, and any related financial responsibilities.
- Read all divorce mortgage agreements carefully.
- Remove mortgage liability from the non-owner's credit report.
- Expect to pay transfer fees.
- Consider a refinance of the home as an alternative.
- Maintain open communication.
- Keep detailed records of all transactions, including the release of liability.
- Monitor your credit score throughout this process.
- Update your insurance and property tax information to reflect the changes.
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