Along with alimony, visitation and child support issues, few things in a divorce will cause more disagreements than what to do with the family home. In addition to retirement and pension accounts, a family home is probably the most valuable asset to be divided in a divorce. Tradeoffs are inevitable, and in many cases, one spouse will gain control of the home as part of a settlement agreement.
But once that’s been decided, it presents new challenges for the awardee, the biggest one being whether the spouse and children (if there are any) can actually stay in the house. What are the options?
There are basically three things that can happen to a family home as part of a divorce settlement when one spouse is going to retain the property rather than sell it:
• Retain the original joint mortgage. One spouse may keep the home, but both spouses remain liable on the joint mortgage. This works great if you (truly) trust your ex-spouse, who could miss a payment at any time for any reason. It’s important to note that a payment default, regardless of who was responsible, could lead to long-lasting credit damage for each of you.
• Refinance the joint mortgage. When one spouse wants to keep the home, the mortgage can (and should) be refinanced in their name only.
• 'Assume' the original mortgage. This can be a great option if your existing mortgage allows for a loan assumption. This makes sense when you have good rate and payment terms on your existing mortgage.
Of the options, an assumable mortgage is the one that people have the most questions on in my experience. This also happens to be the option where misconceptions are the most common.
What To Know Before Trying To Assume A Loan
Why would a spouse want to assume a loan? Assuming a loan means one borrower is removed from the current loan without the remaining borrower having to refinance the existing loan.
There are several reasons why a spouse in a divorce would want to assume a home loan. If the current loan terms are favorable (primarily the interest rate), this can be an easy way to protect those favorable terms instead of refinancing, perhaps at a higher interest rate. In most cases, assumption fees are less than the overall cost of a refinance. Oftentimes, an assumption can be completed by paying less than $1,000 in fees, if it can be completed at all. An assumption, if done correctly, accomplishes the goal of separating yourself completely from your existing joint mortgage.
What are the misconceptions of attempting to assume a loan in a divorce? One of the common misconceptions is the belief that all loans are assumable. This is far from the case. In fact, most loans issued post-2008 do not have an assumable loan feature. A spouse can easily determine whether their loan is assumable by looking at their original promissory note. Under no uncertain terms should you apply to assume your mortgage unless you have confirmed that your current lender allows for it. Otherwise, you’ll be spinning your wheels, and precious time can be lost as interest rates fluctuate.
Many also believe that assuming a loan can be accomplished with a simple call to the bank and a few signatures. When you assume a loan, the lender will require full documentation of your income, assets and other relevant information that will prove you can make payments without the help of your ex-spouse. In this regard, an assumption is no different than a refinance, but you are assuming the loan because you expect to benefit from better terms. The burden remains on you to demonstrate that you can take on the full debt load by yourself.
A third misconception is that many people think assuming a loan is always a better way to go. That’s not necessarily the case. Rates remain relatively low, so refinancing doesn’t necessarily mean a higher payment. In fact, by re-amortizing the loan over another 30 years, this could result in a lower monthly payment and create a better overall cash flow. Don’t be quick to assume that a higher interest rate is going to put you in a worse-off financial position. It depends on what your objective is.
You should certainly take into account the costs you will avoid by assuming a loan instead of refinancing. These can include application fees, appraisal fees and title insurance policies. But just because there are higher upfront costs, don’t let that sway you without first doing a thorough longer-term analysis based on your personal circumstances.
It’s also misguided to think a refinance will take the same amount of time as assuming a loan. A refinance typically takes about 30 days, but a loan assumption can take anywhere from three to six months, depending on the lender. I’ve seen some take as long as six months, only to be told they didn’t qualify for a loan assumption. Rates in that period of time had increased by 0.375% — a significant long-term impact. There also may be greater documentation requirements, which is not the path of least resistance.
Exercise Due Diligence
If you’re thinking of assuming a loan in a divorce, start by calling your current lender and asking them for a copy of your original promissory note. The promissory note will tell you whether the loan is assumable or not. In some cases, clients are told their loan is assumable only to find out months later that it is not, and a refinance is the only option.
Due diligence up front is critical and you need to understand that while it may put you in a better long-term financial position, an assumption is not always the easiest or best way to go. Also keep timing in mind, as delays during the assumption process can create quite a problem when a divorce settlement agreement requires completion within a certain time frame.
