Divorce proceedings often involve a multitude of complex financial issues, and one of the crucial areas that family law attorneys must navigate is the division of real estate assets. Frequently, marital properties are encumbered by mortgages, making mortgage assumption a pivotal consideration, especially with 30-year fixed interest rates in the mid to upper 7’s at the time of this writing. This article is tailored for you, the family law attorney, providing you a comprehensive understanding of the differences between simple and qualified mortgage assumptions, the pertinent mortgage documents to review, and how they can impact divorce cases. The terms lender and loan servicer are used interchangeably throughout.

Simple or Legal Transfer Mortgage Assumption

In a simple assumption, the spouse who was awarded the home, whether they are on the current mortgage or not, incident to divorce, assumes responsibility for the monthly mortgage payment, and any taxes, insurance, and HOA dues from the date of the judgment forward. It is a different use of the word assume than you may be thinking. This does not release financial liability for the vacating spouse who is on the mortgage. They essentially become a non-owner occupant co-borrower at that point. If the assuming spouse misses a payment(s) or even defaults on the mortgage, the loan servicer will attempt to collect from the former spouse and will report negative payment history to the credit bureaus for all borrowers obligated on the mortgage.

In the instance where the spouse who was awarded the home, but is not on the current mortgage, they now have what is called a successor’s interest in the property via the Garn St-Germain Depository Institutes Act of 1982. This Act prevents the current servicer from exercising the due on sale clause of the mortgage and must provide the successor all the same rights as the original borrower, like sending the monthly mortgage statements to them, allowing the same grace period for monthly payments, amongst others. The assuming spouse must notify the servicer of the intent to exercise this right with a letter and confirmation of the transfer, usually a copy of the final judgement of divorce. I would be happy to provide a suggested verbiage to send, upon request.

Qualified Mortgage Assumption

In contrast, a qualified mortgage assumption can involve more significant changes to the mortgage terms, or the original terms can remain the same. A qualified assumption always requires the lender’s approval, and they may charge an assumption fee. The assuming spouse must qualify for the mortgage, but credit requirements may be more stringent. Lender cooperation is vital for a qualified assumption. In a qualified assumption, the terms of the mortgage can be renegotiated. This may include adjusting the interest rate, extending, or shortening the loan term, or other modifications to align with the assuming spouse’s financial capacity. The assuming spouse assumes responsibility for mortgage payments based on the renegotiated terms. With a qualified assumption, the non-assuming spouse is generally released from all future liability on the mortgage, offering greater financial protection to them.

What types of mortgage loans are assumable and what documentation to review?

1. FHA, VA, and USDA Rural Development Loans are eligible for Qualified Assumptions. On a VA assumption, if the assuming spouse is a non-veteran, or a veteran with insufficient entitlement, the vacating veteran’s entitlement will stay attached to the existing VA loan, until it is paid off. This may limit the vacating veteran’s new VA loan financing options.
2. Conventional loans, Fannie/Freddie, are eligible for a Simple Assumption and may be eligible for a Qualified Assumption at the mortgage servicer’s discretion.  Adjustable-rate mortgages are generally assumable while still in the adjustable phase. Once the option to convert to a fixed-rate mortgage is exercised, it is no longer assumable. If there is secondary financing on the home, like a home equity line of credit, the first mortgage is not eligible for assumption. If there is mortgage insurance on the first mortgage, in addition to the servicer, the mortgage insurance company will also have to approve the assumption. Mortgage servicers typically like to see at least 6 months of payments made by the applicant. They may also require an additional principal reduction payment and a full credit underwrite to approve the assumption, which will typically come back with new terms, i.e., a new interest rate that is more representative of the current market rate.
3. Documentation to Review for all loan types: Closing Disclosure: This is a 5-page document that details the terms of the financing. It is signed at the closing of every mortgage loan. On the top of page 4 are the loan disclosures. Under the assumption clause, there are two options that can be selected. Option 1 reads, if you sell or transfer this property to another person, your lender will allow, under certain conditions, this person to assume this loan on the original terms. Option 2 reads, if you sell or transfer this property to another person, your lender will not allow assumption of this loan on the original terms. One of these boxes will be checked. Mortgage/Deed of Trust: This is the document that assigns the home as collateral for the mortgage. It is recorded in the County where the home is located. Within this document is the Alienation/Due on Sale Clause, on a Michigan mortgage it is clause 19. Transfer of Property or Beneficial Interest in Borrower. This clause allows the lender to call the loan due in full upon an unauthorized transfer of title of any part of the secured interest.

Selecting the Appropriate Option

Family law attorneys play a pivotal role in guiding their clients through the divorce process, including making decisions about mortgage assumption. Consider these factors when advising your clients:

• Property Value and Equity – Determine the current market value of the property in question. Calculate the amount of equity in the home, as this may affect the decision to assume the mortgage.

• Their Financial Situation – Assess the client’s current financial status, including income, expenses, assets, and liabilities.
• Existing Mortgage Terms – Review the terms and conditions of the existing mortgage, including interest rate, monthly payments, and any prepayment penalties. Determine if the mortgage is assumable according to the lender’s policies and the loan agreement.
• Future Ownership and Asset Division – Consider how the assumption of the mortgage aligns with the client’s long-term goals for property ownership and asset division. Discuss the impact of this decision on the overall division of marital assets.
• Contingency Plans – Help the client develop contingency plans in case a qualified assumption of the mortgage becomes unfeasible, denied by the lender, or problematic in the future.

 

For family law attorneys, helping clients make informed decisions regarding mortgage assumption during divorce proceedings is vital. Understanding the distinctions between simple and qualified assumptions and their potential impact on financial outcomes is essential. Collaborating with a CDLP can be invaluable in ensuring that your clients’ best interests are protected while navigating the complexities of divorce-related mortgage assumptions.