Divorce can be complicated even when both spouses agree on most issues. Outside the emotional impact of the proceeding, much of the confusion in a divorce is how to handle the distribution of assets owned by the couple. Specifically, ownership of the house can become a touchy subject during an already stressful experience.
One process that can simplify the issue of property ownership is mortgage loan assumption. Let’s discuss how this process works and its benefits for the divorcing couple.
What is Mortgage Assumption?
A loan assumption agreement happens when one party takes over an existing mortgage for another party and accepts all the responsibilities and potential benefits of owning that home. A home loan assumption simplifies the transfer of ownership to avoid creating a new mortgage and paying those extra costs.
In a divorce proceeding, the spouse who maintains control of the property will assume the mortgage and its liability alone. In contrast, the other spouse is removed from the loan agreement. The assuming spouse will then have sole responsibility for the property and accept liability for all mortgage payments.
Eligibility for Mortgage Assumption
For a home loan assumption to succeed, the lender and both parties in the divorce must agree to transfer ownership of the current mortgage to one party. The qualifications necessary for loan assumptions depend on the mortgage lenders and the type of loan (conventional loans, USDA loans, FHA loans, VA loans, etc).
Typically, a lender will require a credit score of at least 580 even to consider granting an assumable mortgage. The maximum debt-to-income ratio for the spouse assuming the mortgage may be 43%.
The primary obstacle for many divorce settlements with a mortgage assumption process is meeting these qualifications. Often, the current loan was granted based on the combined income and financial strength of the couple. Now that only one person is taking over the existing mortgage, it may be harder for them to qualify by themself and afford the monthly payment.
Mortgage Assumption in Divorce Proceedings
Loan assumption is a common strategy during the divorce process to help both parties manage the transfer of property ownership. It is a tool used in the marital settlement agreement to ensure one spouse assumes control of the existing loan while the other is free from liability. This strategy can foster a smoother divorce settlement.
Benefits of Mortgage Assumption in Divorce
There are numerous benefits to one spouse assuming the mortgage loan from the other. First, it can help avoid foreclosure if there have been missed monthly payments. Second, if the existing mortgage has a favorable interest rate, the assumption process allows the owner to keep that interest rate. Lastly, it simplifies the division of property during the divorce decree.
Potential Drawbacks
Although choosing to assume the mortgage from your spouse seems like the best option, there are some drawbacks worth considering. The sole owner of the property now becomes fully responsible for future payments and property decisions, while the former spouse is free from these obligations.
Typically, assumable mortgages also affect the sole owner’s credit history, potentially damaging their financial future. To complete the process, you must obtain approval from the mortgage lender, and most lenders have high standards for granting an assumable loan term.
Legal and Financial Aspects
Although this process may be simpler and more efficient than mortgage refinancing, there are still legal and financial obligations to consider before assuming full responsibility for a loan during a divorce settlement.
The Role of Divorce Attorneys and Legal Agreements
Divorce attorneys play an essential role in these legal proceedings. They help mediate between the parties to establish asset division. Therefore, you must consult your attorney to ensure proper legal documentation is in place before taking over a home loan in the divorce decree. Proceeding without legal guidance could risk your financial status.
Financial Implications and Considerations
Speaking of finances, assuming a mortgage has plenty of monetary side effects. There may be tax considerations that will affect your finances in the long term. Acquiring the home fully without securing a new loan could affect spousal support or alimony calculations.
You should also consider how keeping the mortgage affects your future financial goals. Before deciding to take over the loan for your marital home, evaluate the impact on your retirement savings, investment opportunities, and monthly budget. Not all loans or homes are worth holding onto.
Alternatives to Mortgage Assumption
Since not all mortgages are beneficial to either spouse in a divorce proceeding, a loan assumption may not be the best option. Fortunately, there are other alternative solutions to handle property ownership during your divorce.
Selling the Property and Dividing the Proceeds
Many couples find it difficult to keep a family home after a divorce. The memories associated with it create an emotional challenge for the assuming spouse. Instead, you could decide to sell the property and split the proceeds with your ex-spouse so neither of you is liable for your marital home.
Selling a home during a divorce is a far more complex process than assuming a mortgage, but you can both take the money and move on to the next stage of your life.
Refinancing the Existing Mortgage
Refinancing is another option to handle the mortgage transfer. Instead of taking over the initial mortgage, you refinance into a new loan that does not include the other spouse’s name. This process is also more complex than a simple assumption of the loan, so it may only be favorable if current interest rates are better than the one on your first mortgage.
“Cash Out” Options
Lastly, you can cash out on your home with a quick sale to a cash home-buying company. These investing firms often take homes in any condition and can complete the sale extremely fast.
Once you accept a cash offer, you could close on the sale in a couple of weeks, just in time for the divorce proceeding to be settled. This process allows for a clean break and a simplified division of assets.
The Bottom Line
A-List Properties is a cash home-buying company that specializes in quick transactions. We buy homes regardless of their condition or the reason for the sale. If you accept our fair cash offer, we can close the deal in 14 days or less.
Call us today at 972-526-7042 or complete the online form to request a no-obligation cash offer for your house.
Zach Shelley
Zach Shelley is a seasoned real estate investor with a diverse network spanning across the nation. As the founder of his own real estate venture, Zach is committed to offering innovative solutions to homeowners facing various real estate challenges.. Through his dedication and strategic approach, Zach continues to make a significant impact in the real estate industry, providing homeowners with alternative pathways to navigate their property transactions.
