If you are going through a divorce, one of the top questions likely on your mind is what to do...
What is a Loan Assumption?
Deciding the fate of marital property is a crucial aspect of any divorce settlement. The process often involves intense emotions and complex financial considerations, making it all the more challenging. One common alternative couples are considering to handle the marital home that has gained popularity in today’s unique market conditions: loan assumption.
The recent increase in both interest rates and home prices has added additional pressure on homeowners navigating divorce, limiting their available options. As a result, many individuals are actively seeking creative and practical alternatives. In this blog post, we explore the nuts and bolts of loan assumptions to help you make an informed financial decision that aligns with both your financial goals and your unique divorce circumstances.
What is a Loan Assumption?
In addition to significant increases in housing costs that we have seen since the pandemic,, coupled with the reality of doubling housing costs for a divorcing couple, many couples are evaluating loan assumptions to minimize overall housing expenses. This option provides an opportunity to maintain current, affordable housing costs, retain homeownership, and/or to provide stability for children.
A qualified loan assumption is when one party of a joint debt, such as a shared mortgage, qualifies to retain and retitle the original loan into their name, solely. This essentially releases the other debtor (typically a former spouse or domestic partner) from the mortgage payments and debt obligation. Many homeowners are looking to explore this option in a divorce under the assumption that the individual retaining the loan will be able to keep the original loan terms, where they hope to keep previous low mortgage rates and their associated lower, current mortgage payments.
Clients in the Colorado area are looking into loan assumptions to determine if they are an option as they go through their divorce. Oftentimes, bank representatives may even confirm the availability of a loan assumption. However, according to the Certified Divorce Lending Association, loan assumption options may not always meet client expectations post-divorce. It’s important to work with a Certified Divorce Lending Professional (CDLP) or mortgage planning assistance to determine which mortgage path is best for you during your divorce and to determine what information you can rely on to make decisions in your divorce that remain reliable post-divorce for agreements to be carried out.
Keep these important considerations in mind as you evaluate a loan assumption in you divorce:
Not All Institutions Offer Loan Assumptions
A CDLP can help you review your loan documents to determine if your current institution offers loan assumptions. Sometimes calling your loan provider and inquiring can be misleading (see bullet point 5 below).
Some Types of Loans Are More Likely to Provide Loan Assumption
Government mortgage loans such as FHA, VA, and USDA loans often offer loan assumption programs. When it comes to VA loans, if the individual assuming a VA loan is not a veteran, the veteran will forgo their VA entitlement as long as the VA loan assumed is operating until it is paid in full. This limits a veteran’s ability to obtain another VA loan on a future property. Conventional loans may offer loan assumption programs, but are not required.
Actual Loan Assumption Terms May Not Reflect Original Terms
While institutions may offer loan assumption, they are not required to provide a loan assumption with the original loan terms, such as the original low interest rate. They can sometimes offer a loan assumption with higher rates or any other terms their current procedures deem necessary at the time.
No Cash/Equity Buy-Out
Absolutely no cash can be taken out during a loan assumption. Therefore, if the spouse who is not retaining the home requires an equity cash payment in order to produce an equitable and agreeable division of asset terms, a loan assumption can not be used to meet those needs.
Mortgage Sales Practices Can Be Misleading
Mortgage sales is a practice and financial institutions do their best to keep their current customers’ business. Be aware of bait and switch behaviors where mortgage professionals offer you one thing and, after further inquiry or qualification processes, offer you something different then expected, with higher rates then the original loan, a traditional refinance loan, or possibly no offering at all. Once again, working with a Certified Divorce Lending Professional for mortgage planning assistance can help protect you from these practices and provide reliable post-divorce information.
Is Assuming a Loan Best for You?
Even armed with this information, decisions around a loan assumption can be challenging. As you consider whether this is the right financial path in your divorce, keep the following in mind:
- While you do normally save on fees in a loan assumption (as compared to a refinance), you lose the option of re-amortizing your loan over a new 30-years. The latter approach could result in lower payments and provide you with more cash flow as you transition into new financial responsibilities on your own.
- Modeling the option of loan assumption against refinancing with different teams and current interest rates is important. Find a Certified Divorce Lending Professional to help you align your lending strategy to your long-term financial goals.
- While a loan assumption doesn’t require a full refinance, you do have to qualify for the payments on your own. This includes an evaluation of your income, assets, credit scores, and more.
- Typically, loan assumptions are a more affordable option than a refinance, because there are fewer fees, no appraisals needed, no application fees, and no fees paid to title/insurance companies.
- Consider the timing of your divorce alongside the timing of this decision. More traditional refinances typically take 30 days and loan assumptions can take 3-6 months. During this time, interest rates can also change, which could impact your strategy.
Deciding the fate of marital property in divorce is a complex and emotionally charged process. However, amidst the challenges, loan assumptions have emerged as a popular alternative to refinancing or selling the marital home in today's unique market conditions. By staying informed and seeking professional guidance, you can navigate the complexities of divorce and make sound financial choices for a stable future. At A.M. Financial, we can help model various approaches and show you how they will impact your budget, cash flow, and long-term goals. Contact us to learn more about how we can support your evaluation of a loan assumption or other financial aspects of your divorce in a free consultation.