Can one spouse assume the mortgage releasing the ex-spouse from future liability?
With rising mortgage interest rates, many divorcing homeowners ask, “Can I assume the existing mortgage?” By assuming the existing mortgage, they hope to eliminate the need to refinance while keeping their current mortgage terms.
If only it were this easy!
An assumable mortgage is a loan that can be transferred from one party to another with the initial terms remaining in place. Not all mortgages are assumable. In most cases, the only assumable mortgages are FHA, VA, and USDA home loans. Conventional loans are not typically assumable.
Mortgage assumptions still require the current lender to approve the new borrower’s creditworthiness and ability to repay the mortgage. It isn’t as simple as one party agreeing to take over the mortgage. When transferring ownership of the marital home to a non-borrowing spouse, steps are needed to avoid an acceleration of the due on sale clause of the existing mortgage note.
Although the marital settlement agreement may determine who retains ownership of the marital home or other real property after the divorce is final, it is crucial to understand that the Deed, Decree, and Debt are three separate issues to settle.
The Deed and Transferring Ownership
A property owner can transfer their ownership of the real property to another party using a Quitclaim Deed or other instrument. When both parties are co-mortgagees on the mortgage note, no further action is typically needed when retaining the current mortgage.
However, it is essential to take action and notify the current mortgagor of the ownership transfer to avoid an acceleration of the mortgage due to a transfer of ownership when the party retaining the home is not obligated on the current mortgage note.
A word of caution; if the vacating spouse wants to remain on the deed to the real property until their name is removed from the mortgage, the mortgage financing options available to the vacating spouse may be limited. Please refer to a CDLP™ to determine any impact on the vacating spouse.
The Garn-St Germain Depository Institutes Act of 1982 protects consumers from mortgage lenders enforcing the due-on-sale clauses in their mortgage loan documents when the transfer of ownership includes transfers to a spouse, or children of the borrower, transfers at divorce or death, the granting of a leasehold interest of three years or less not containing an option to purchase and the transfer into an inter vivos trust (or a living trust) where the borrower is a beneficiary.
When one spouse is awarded the marital home and ownership is transferred solely to that spouse, leaving the current mortgage intact, the receiving spouse agrees to take sole responsibility for the mortgage payments through the assumption process. A loan assumption allows a transfer of ownership and leaves the loan intact at the same interest rate, loan terms, and balance. However, legally assuming responsibility for paying the existing mortgage is often confused with loan assumption, where the original mortgagee is released from further liability.
Assumption & Release of Liability | When a former spouse assumes ownership of the home and the mortgage, this does not always mean the mortgage lender will release the original borrower from their financial obligation or liability. A loan assumption is a transaction in which a person (the “assumptor”) obtains an ownership interest in real property from another person and accepts responsibility for the terms, payments, and obligations of that other person’s mortgage loan. The assumptor is liable for the outstanding debts, and unless a release of liability is requested, the original borrower will also remain liable.
In some assumptions, the lender may release the original borrower from their obligation on the promissory note. However, in most cases, the original borrower remains liable on the mortgage note. This means that, depending on state law and the circumstances of the particular case, if the new owner stops making mortgage payments in the future and goes into foreclosure, the lender may come after the original borrower for a deficiency judgment to collect the debt
A simple letter including a copy of the Divorce Decree sent to the mortgage holder may suffice as notice to the servicer. Sample wording follows:
Loan No. 12345678
GARN-ST. GERMAIN ACT ASSUMPTION NOTICE
I am writing to inform you that, as of April 1, 2018, my husband and I divorced by order of the Circuit Court of Henry County, Georgia. According to the divorce decree, Mr. Smith must transfer to me his entire interest in the marital residence located at 1234 Main Street. The transfer will take place on May 30, 2018. On that date, I am to assume the mortgage that encumbers the property and make the payments thereon.
Therefore, pursuant to the Garn-St. Germain Depository Institutions Act of 1982, I now notify you of my intent to assume the Mortgage and Note. Accordingly, you may begin mailing statements to me immediately. Thank you for your cooperation and understanding.
When the existing mortgage to the marital home or other real property remains unchanged, involve a Certified Divorce Lending Professional (CDLP™) in the early settlement stages to obtain a complete analysis of the mortgage financing requirements and effects on both divorcing spouses. This essential step can help provide a smooth transaction post-divorce and remove unnecessary burdens and frustrations.
As a divorce mortgage planner, the CDLP™ can help divorcing homeowners make a more informed decision regarding their home equity solutions while helping the professional divorce team identify any potential conflicts between the divorce settlement, home equity solutions, and real property issues. Involving a Certified Divorce Lending Professional (CDLP™) early in the divorce settlement process can help the divorcing homeowners set the stage for successful mortgage financing in the future.
If you’re ready to learn more about a mortgage refinance and how it might benefit you, contact us at the Lindley Group to learn about what refinancing options there are available to you.