One of the largest aspects of dealing with a divorce is figuring out the housing situation. If you owned a home together with your spouse, chances are that one of you wants out of the residence. Just getting divorced is not enough for the lender that holds your mortgage to release your obligation to the mortgage, though. Typically, you need to refinance the loan into the other person’s name in order to get yourself off of the loan. In some cases, however, you can use a mortgage assumption after a divorce.
What is a Mortgage Assumption?
First, let’s start with what a mortgage assumption is and how it works. As the name suggests, you can take on a mortgage without applying for a new mortgage. When you assume a mortgage, you take over the terms and the remaining balance of the mortgage. This means you basically take up where the original owner left off while keeping the same interest rate and loan balance.
Who Qualifies for a Mortgage Assumption?
Just because you can assume a mortgage does not mean that everyone qualifies. Just as you would have to qualify for a new mortgage, the same is true for a mortgage assumption. The lender has to evaluate your risk level and your ability to repay the loan before they will allow the assumption. For example, if you have a 600 credit score and a 45% debt ratio, chances are you will not get approved to take over the mortgage. If on the other hand, you had a 700 credit score and a 28% debt ratio, you might have a better chance of qualifying for the assumption.
Not Every Loan Allows Mortgage Assumption
Something you have to understand, however, is that not every mortgage program allows for a mortgage assumption. Generally, FHA and VA loans are among the top programs that allow it. Conventional loans typically do not allow assumptions to take place. Even within the FHA and VA program, however, you have to receive lender approval in order to make the process go through.
How does One Spouse Get off the Hook?
The idea behind the mortgage assumption after a divorce is to get one spouse off of the loan. In order for this to happen, the issuing lender must release that person from liability for the loan. Without this release, both parties are still equally responsible for the loan. The spouse that is leaving the property and giving up his rights to the property must have proper documentation showing that he is no longer responsible so that he can move forward with his financial life.
What are the Benefits of a Mortgage Assumption after a Divorce?
The largest benefit of a mortgage assumption after a divorce is the ability to keep the same interest rate. If rates are higher now than they were when you first bought the home, you can take on that same mortgage and not have to worry about having a higher mortgage payment. This is especially helpful if you are used to paying that payment already; it serves as one less thing to change after you get divorced.
Another benefit is the ability to save on closing costs. If you were to refinance the loan into your loan alone and quit claim your ex-spouse off of the loan, you would have closing costs to pay. These closing costs could get quite significant depending on the amount of work that needs to be done to process and close the loan. A loan assumption usually requires much lower fees and a quicker processing time.
While a mortgage assumption is not the most common thing to hear about today, it is a possibility in the face of divorce with certain programs. If you want to know if your loan is assumable, talk to your lender or read the fine print on your closing documents. If you have a government-backed loan, chances are you can assume the loan. Before you jump in and take advantage of this opportunity, though, you should check and see if it is worth it by comparing today’s rates to the rate on the mortgage. Sometimes there is enough of a savings to gain that it is not worth assuming the loan rather than refinancing it.