Interest rates are higher than we have seen in decades. How does that impact the decision to assume … [+]
A wide range of memories and emotions are typically attached to the marital home. It is often the largest marital asset and, if mortgaged, often is encumbered with the largest marital liability. The current residential real estate landscape has made it difficult to find creative ways to maintain the marital home. Simply assuming the house and mortgage are no longer straightforward options. While mortgage interest rates plummeted to unprecedented lows in 2020, many home values soared, resulting in substantial appreciation. For divorcing homeowners who need to buy out a portion of the home equity from their spouse, this can create a financial dilemma.
In addition to the daunting task of splitting marital home equity, couples may also face substantially higher mortgage interest rates – in some instances, more than double their original rate. This combination risks a much higher mortgage payment, an extremely challenging situation for a family whose income will now be split among two households. For example, if a couple has a $300,000 mortgage with a 30-year fixed rate of 3.25%, their principal and interest payment is $1,306. If they divorce and one spouse needs to refinance at 7.25%, the principal and interest payment jumps to $2,047 – a $741 increase, which is 57%!
Below are critical issues for individuals to understand before agreeing to keep the house and mortgage.
- Be aware of Alienation, Acceleration, or Due-On-Sale Clauses. Some mortgage agreements require that if any interest in the property is transferred without the lender’s prior written consent, the lender may require immediate payment in full of the remaining mortgage if not prohibited by applicable law.
- One spouse cannot necessarily assume the mortgage from the other spouse. Start by reading your Closing Disclosure and Mortgage Note to determine whether your lender will allow assumption of the loan on the original terms. Government-backed mortgages such as FHA, USDA, and VA often are assumable. Most conventional mortgages are typically not assumable. However, even if the closing disclosure or mortgage note indicates the mortgage is not assumable, it’s worth pursuing the bank or financial institution that owns your mortgage as well as the loan servicer. The loan servicer is the company that accepts the mortgage payments and may be a different company than who owns the mortgage. Some mortgage companies and servicers will allow a conventional loan that is not assumable to be assumed by a spouse because of the divorce.
- There are two types of loan assumptions. A Legal Transfer Assumption or Simple Assumption results in only one spouse assuming responsibility for making the mortgage payments while the other spouse is moved to a secondary position to pay off the loan, similar to being a co-signer on the loan. A Qualified Assumption or By Novation results in one spouse assuming full responsibility for the payments and terms of the loan while the other spouse obtains a full release of liability. The assuming spouse will need to qualify financially for this type of assumption. The guidelines may be even more stringent than they were initially since previously, both spouses were responsible for repayment, and now there will only be one borrower liable.
- Even if one spouse can assume the mortgage, that does not solve how the equity in the home will be bought out. If the house is worth more than the mortgage, the spouse keeping the home and mortgage will need to “buy out” that equity by allocating more cash, investments, or some other marital asset to the spouse who is moving out.
- Most lenders require the divorce decree before allowing a spouse to officially start the assumption process – meaning you can’t even apply for one spouse to solely assume the mortgage until the divorce is finalized in court. Be thoughtful with timelines in your Martial Settlement Agreement (MSA), as the process of qualifying for an assumption can be long and may not ultimately even be successful. While you may need to wait to start the official process, you do want to start talking to your lender and mortgage servicer as soon as you start your divorce to know if it’s even realistically a viable option.
- If one spouse recently returned to the workforce, that income may not be included for qualification without a stable employment history.
- If child or spousal support payments are being used as income to qualify for the mortgage, there are timelines for how long the recipient must have already received the payments before closing on the mortgage (typically six months) and how long the support must continue in the same amount after closing on the mortgage (typically three years).
- If the spouse wanting to assume the mortgage will be making support payments, child support is typically counted as a liability, while spousal support payments are typically counted as an expense of the payor for mortgage qualification.
- The mortgage company may require the house deed to be transferred and filed with the County Recorder’s office before refinancing or assuming the martial mortgage. Be thoughtful of the language in the MSA regarding the timing of transferring the deed between spouses to avoid delays in mortgage underwriting.
- Make sure your MSA includes a clause requiring your ex-spouse to sign any necessary documents for you to refinance or assume a mortgage, as well as a penalty for missing any deadlines.
Working with the right professionals will be key to making sure loan assumption goes smoothly.
Working with an expert who can assist in navigating these unique hurdles is critical. A Certified Divorce Lending Professional (CDLP®) specializes in the mortgage complexity that accompanies divorce while also honoring the emotional nuance of your situation. This divorce professional’s expertise goes far beyond standard mortgage guidelines and most mortgage broker’s knowledge. They are familiar with common gaps that occur between divorce agreements and mortgage lenders’ requirements that threaten your ability to keep the marital home. ACDLP® can work with you to:
- Recommend steps such as completing a home inspection to address any unknown costly repairs and how that impacts your negotiations.
- Review your current mortgage, credit, individual and joint liabilities and help ensure your credit is in good condition for mortgage financing.
- Exploring refinancing options and the potential impact on your future finances.
- Collaborate with your financial advisor regarding the affordability of maintaining the family home or the benefits of considering alternative housing options.
- Collaborate with your divorce attorney on how to structure child or spousal support payments in order for a mortgage underwriter to consider the support payments as “qualified” income.
It may be an option in your divorce negotiations to receive support as a lump sum or monthly payments. It is important that you have a team working together for the best interests of you and your family. Your financial advisor and CDLP® can collaborate with your attorney to determine how to structure your settlement to align with your financial goals for a holistic approach, providing creative solutions during this vulnerable period. You may want to keep your marital home for many reasons -such as a preferable school district, ideal location for work, and bonds shared with neighbors and community.
You are facing a significant change in your finances and family structure and deserve to feel empowered by the decisions you are making for your next chapter. It goes beyond dividing assets, liabilities, and monthly payments. Understanding the ramifications of one spouse maintaining your marital home or any vacation or rental properties owned jointly with your spouse is imperative for a bright future. Divorce mortgage planning will provide a clear perspective on your financial commitments. Start with the owner and servicer of your existing mortgage. Some are quite resourceful and want to help so they don’t lose your business, but because interest rates were so low for the past 15+ years, it was often better to refinance than to try to assume an existing mortgage. As a result, few mortgage professionals are aware of the nuances of mortgage assumptions available due to a divorce. You can get quality information through The Divorce Lending Association on mortgage financing during and after divorce.
Who will you work with to make informed decisions about your mortgage financing options?
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