A Guide To Loan Assumption After A Divorce

Mortgage assumption can be advantageous because the buyer will have the existing loan’s interest rate, making it a great choice when interest rates are very high. 

With a divorce mortgage assumption, the other original borrower will be freed from the mortgage obligations, protecting their financial future in case their ex-spouse no longer has a stable income.

However, it is important for sellers to consider all the legal and financial implications of assuming a mortgage, including the impact on one’s credit score if the assumption process is not completed properly. Couples going through divorce should discuss their decision with a financial advisor or family law attorney before agreeing to anything. 

Impact on Tax Situations

Before undertaking the mortgage assumption process, you must understand how a mortgage assumption will impact your taxes that year. 

You may have to pay the capital gains tax, which can significantly reduce the money paid for the current equity. Thankfully, Texas has no capital gains tax for property sales, so you will only pay federal taxes.

You may be able to claim a home sale exclusion, which will prevent a portion of the sale from being taxed. The amount you can exclude will depend on the amount and your own income, and it is only eligible if this is a long-term capital gain, meaning you have owned it for more than a year.

Conversion to Business Property

If you own a business, you may choose to have your company take over the mortgage payments through a business mortgage assumption as part of the divorce settlement. This will also allow you to deduct a number of home expenses from your taxes, such as loan interest, property taxes, and repairs. 

This requires careful consideration because turning a family home into a business property can have major tax implications. Always seek out professional advice both to protect your financial health and that of your business. 

Consultation with a Tax Professional

With mortgage loan assumptions, navigating all the tax implications can be difficult, which is why it’s important that those seeking this option talk to a tax professional and a real estate attorney before they assume the mortgage. 

These professionals can also ensure that all financial documentation is in order and that everyone understands the implications of transferring the current loan to a different borrower. 

How Do Mortgage Loan Assumptions Work?

There are a few steps involved in divorce mortgage loan assumption, including the following. 

Lender Assessment

The mortgage lender will investigate the creditworthiness and financial situation of the spouse assuming the mortgage, such as their debt to income ratio and their credit history.

Mortgage Loan Assumption Process

The lender will want both parties to provide financial documentation and proof of the divorce, including the divorce decree. 

With this, one spouse will file a quitclaim deed and transfer property ownership to the other spouse; there will then be a new mortgage contract in one borrower’s name only. 

There are typically closing costs associated with mortgage loan assumption, called assumption fees, and the inquiry will show up on a credit report. 

Long-Term Financial Commitments

It is important that the assuming borrower understands the implications of paying the existing mortgage loan on their own. They are now entirely responsible for the monthly payment, as well as property taxes, mortgage insurance, and any other home-related costs. 

Who Qualifies for a Mortgage Loan Assumption?

Not all mortgages are eligible for divorce mortgage assumptions. Most conventional loans are excluded from this option; however, FHA loans, VA loans, and USDA loans typically allow for assuming a mortgage. 

Lenders will want the assuming borrower to be in good financial shape, just as if they were taking out a new loan. This includes financial stability, a good credit history, and a reasonable debt-to-income ratio. 

Additionally, the mortgage lender will appraise the market value of the property, so it is possible that you have to pay part of the expected purchase price if the current loan doesn’t cover the cost of the property. 

Importance of Creditworthiness and Financial Stability

Having a good credit history is crucial for mortgage loan assumption. Those with a great credit score will be eligible for more advantageous loan terms when if they choose to refinance after the loan assumption, including a good interest rate. 

As such, pay close attention to your financial situation while negotiating your divorce settlement agreement so that you are in good shape to take on the mortgage payments. 

Advice on Mortgage Loan Assumptions

Navigating the mortgage loan assumption process can be challenging, which is why professional advice is crucial. 

Discuss the possibility of divorce mortgage assumption with your divorce lawyer and financial advisor so that they can help you understand the long-term financial impact, such as how housing market changes and property tax rises may make it difficult to afford the property on your own. 

The Mortgage Loan Assumption Process

While there are a variety of factors to consider when deciding whether to pursue mortgage loan assumptions, actually assuming a mortgage is a straightforward process that only takes a few steps. 

Contact the Lender

Your lender must be involved in assuming the mortgage; otherwise, you may run the risk of trouble if the lender becomes aware that the mortgage is no longer under the original terms. 

As not all mortgage loans are eligible for mortgage loan assumption, you must ask the lender whether it is possible to transfer the mortgage to one person. Conventional loans are typically ineligible, but they may differ from lender to lender.

Complete Documentation

Your lender will explain what documentation is needed to transfer the existing mortgage. This includes financial information from the assuming spouse, who needs to requalify for the mortgage based on their current financial standing.

The lender will also want to see a copy of the divorce decree as evidence of why the property should be transferred. The spouse assuming the mortgage must sign a promissory note that outlines the loan terms and demonstrates their promise to repay the mortgage. 

Additionally, the spouse removed from the mortgage may need to sign a quitclaim deed that removes them from responsibility for the mortgage and surrenders their rights to the property. 

Finalize the Mortgage Loan Assumption Agreement

When the assuming party has been approved, the mortgage loan assumption is finalized. This process is similar to when the existing mortgage was finalized: all parties will sign legal agreements regarding their new obligations, which will be duly filed with the lender and the county to show a transfer of ownership.

The spouse who is now the sole homeowner will need to notify other parties as well, including their homeowners’ insurance and a homeowners association about the change in ownership. 

Alternatives to Mortgage Loan Assumption

If it’s not possible to assume the mortgage due to not qualifying or not having the right kind of mortgage, then the couple has to make a careful consideration of their other options. The most common ones are refinancing, selling, or legally buying out one spouse. 

Refinancing

Refinancing a mortgage closes out the existing mortgage and takes out a new one. This is a good option to remove a spouse without a mortgage assumption. 

Typically, the spouse who wishes to take sole ownership will present the lender with the divorce decree and a quitclaim deed from their previous partner, and the new mortgage will be made out in only one partner’s name. Not only does this allow the borrower to keep their marital home, but it also can allow them a better interest rate and more advantageous terms than the old mortgage.

As with loan assumption, this also means that the new single owner is responsible for all expenses related to the property, such as mortgage insurance and property taxes. 

Selling

It is also possible to make a mortgage assumption agreement with a third party, thus releasing both spouses from their legal obligations to the party. This is a good option if you would like to make a clean break and are able to find an acceptable buyer. 

Each original borrower must approve the quitclaim deed, but there is no need to show divorce paperwork because it is treated like any other sale. This may be an easier option for those in a domestic partnership who do not have proof that they are separating in the eyes of the law. 

Another option is to sell the property to a cash home buyer like A-List Properties. We will pay cash for the property, negating the need for assuming a mortgage, and we handle most of the documentation on your behalf. You will also not need to pay closing costs or other fees – working with us is free. 

This may be a better option than mortgage assumptions if you are on a tight deadline or struggling with a contentious divorce. 

Legal Buyout Agreements

A legal buyout works similarly to a loan assumption, but it involves exchanging funds to reimburse the departing spouse for their contributions during the life of the mortgage. 

With a legal buyout, one spouse buys out the other spouse’s equity. To do this, the parties must identify the current market value, calculate their share of the equity, and then agree on how much the departing spouse will receive in return. 

A buyout may be financed in cash, a home equity loan, or a refinance, depending on one’s financial circumstances. 

Buyouts may be chosen if the couple has lived in the home for a long time and has already paid off the mortgage, as there will be no loan to assume. It is also a preferred choice for divorcing couples with children because having one parent stay in the family home will provide a sense of stability for the dependents. 

Conclusion

Loan assumptions can be a helpful way to complete the divorce process equitably; they involve one partner being removed from the existing loan, leaving the other to assume all the responsibilities of a mortgage agreement. 

The assuming spouse must qualify for the mortgage with a good credit history, and not all mortgages will allow for mortgage assumption. If it’s not possible to transfer property ownership with a mortgage assumption, then the spouses may open a new loan through a refinance, sell the property, or have one partner buy the other out.

A-List Properties Provides Easy Solutions for Difficult Real Estate Situations

If you are struggling with a divorce settlement agreement, A-List Properties can help. With our cash buyer services, we remove the need for many of the difficult decisions that come with selling a marital home, and we can complete the entire process in a matter of weeks. 

We work throughout the Dallas-Fort Worth area and beyond, providing seamless real estate transactions with half the hassle. Give us a call at (972) 526-7042 or submit your property address to get your free quote today!