Mortgage Planning in a Divorce – Can You Assume the Loan?

For the first time in decades, interest rates have hit record-breaking highs, more than doubling monthly mortgage payments. Consequently, many of today’s divorcing couples who have a favorable interest rate on an existing marital home may feel handcuffed. How can they see an optimistic path forward when it comes to securing affordable lending after a divorce? Loan assumptions are an increasingly popular solution.

What is an assumable mortgage?

An assumable mortgage is a type of loan that is transferable by the seller and assumable by the purchaser. The purchaser then becomes responsible for the loan through the mortgage assumption. In other words, it may be possible for one spouse to remain in the marital home and take over the existing mortgage on their own.

What makes a mortgage loan assumable?

It depends on the terms set by the lender. Look for relevant clauses in the existing mortgage note, deed of trust, security deeds or loan closing disclosures. There are two types of assumptions that may be possible:

1. Legal Transfer Assumption. In this case, the spouse taking over the loan does not need to prove that they can qualify for the mortgage by themselves. Although they will be legally responsible for paying the mortgage, their former partner is not released from liability—they are effectively in a secondary position, like a loan co-signer.
2. Qualified Assumption. In this case, the spouse taking over the loan must qualify for the mortgage on their own (adequate credit score, employment history, etc.), and their former partner is fully released from liability.

Typically, government-backed mortgages (FHA, VA, USDA) and Fannie Mae and Freddie Mac conventional mortgages are assumable. It is important to note that you cannot take out any home equity in a mortgage assumption.

Is a loan assumption in your best interest?

To find the answer, start by asking fundamental questions such as whether you can comfortably afford to assume the mortgage and how this decision compares to other alternatives in terms of your tax situation as a single person and your overall financial plan.

If you are thinking about proceeding with a mortgage assumption, here are some further questions that must be answered:

1. Has it been allowed by the lender? 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. You want to start talking to your lender and mortgage servicer as soon as you start your divorce so you know if it’s even realistically a viable option.
2. What happens to home equity? 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.
3. Will the timing work? Most lenders require the divorce decree before allowing a spouse to officially start the assumption process—meaning you can’t even apply until the divorce is finalized in court. Be thoughtful with timelines in your marital settlement agreement (MSA), as the process of qualifying for an assumption can be long. Make sure your MSA includes a clause requiring your ex-spouse to sign any documents needed for you to refinance or assume a mortgage, as well as a penalty for missing deadlines.
4. Will your income qualify? If one spouse recently returned to the workforce, that income may not be included for qualification without a stable employment history. Further, 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 who wants to assume the mortgage is going to be making support payments, child support is typically counted as a liability, while spousal support payments are typically counted as the expense of the payor for mortgage qualification.

Mortgage assumption after a divorce can be complex, but when it allows a divorcing party to maintain an attractive long-term mortgage interest rate, the effort may be well worth it. As always, we recommend working with your Corient Wealth Advisor along with the appropriate lending and legal professionals to help you assess and execute this strategy successfully.

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