A mortgage assumption allows one spouse to take over the existing mortgage without changing the loan terms. This means the interest rate, loan balance, and monthly payment stay the same—only the responsibility for the loan changes.

However, not all mortgages are assumable, and there are two types of assumptions to consider in divorce cases:

Qualified Assumption

A qualified assumption requires the assuming spouse to qualify for the loan based on their income, credit score, and other financial factors.

• Lender approval is required.
• The assuming spouse must meet the lender’s underwriting guidelines.
• The spouse being removed from the mortgage is released from liability, protecting their credit if future payments are missed.

When is this option best?

• When the assuming spouse has sufficient income and a solid credit score.
• When the current mortgage has a low interest rate that would be costly to give up in a refinance.

Simple Assumption

A simple assumption transfers mortgage responsibility without requiring lender approval.

• The assuming spouse does not need to qualify with the lender.
• The spouse being removed from the mortgage responsibility will still be liable for the loan, even after the transfer.

When is this option best?

• When both spouses agree, and the assuming spouse is confident they can maintain payments.
• When liability concerns are less pressing, or alternative protections are in place.

Which Loans Are Assumable?

Not all loans allow assumptions, and it’s critical to know which types are eligible:

Assumable Loans:

FHA Loans:

• FHA loans are fully assumable, but the assuming spouse must meet the lender’s credit and income requirements.
• This is often a popular option in divorces due to flexible qualification standards.

VA Loans:

• VA loans are also assumable, but entitlement complications can arise.
• The assuming spouse needs to be a veteran for a qualified assumption, but if they’re not, a simple assumption can be made but the service member’s VA entitlement remains tied to the loan until it is fully repaid.

USDA Loans:

• USDA loans are assumable but require lender approval and income eligibility based on USDA standards.

Non-Assumable Loans:

Conventional Loans (Fannie Mae/Freddie Mac):

• Conventional loans are not eligible for a qualified assumption. They include a due-on-sale clause, meaning the full loan balance becomes due if ownership changes. When the property is awarded via divorce a qualified assumption is exceedingly difficult, if not impossible to obtain but a simple assumption is. Remember that a simple assumption does not remove a borrower from the mortgage, if just assigns responsibility for the mortgage to the spouse awarded the home.
• Divorcing couples with conventional loans usually must refinance to remove one spouse from the mortgage.
• I always encourage those who ask me about a qualified assumption on a conventional loan to try, reach out to their loan servicer and ask. You cannot get a yes if you do not ask.

Jumbo Loans:

• Due to the larger loan amounts and stricter lending standards, jumbo loans are typically not assumable, but again, call your servicer and ask.

What Is Refinancing?

Refinancing means replacing the existing mortgage with a new loan. The spouse keeping the home applies for a new mortgage in their name only, paying off the old loan and removing the other spouse from the responsibility entirely.

Benefits of Refinancing Post-Divorce:

• Removes the other spouse from the mortgage and title.
• Allows the assuming spouse to access home equity for an equity buyout if required by the divorce settlement.
• Provides the option to change loan terms, such as switching from an adjustable rate to a fixed rate or shortening the loan term.

Challenges of Refinancing in a Divorce:

• Higher interest rates: Refinancing at a higher rate than the current mortgage could increase monthly payments.
• Qualification hurdles: The spouse applying for refinancing must meet the lender’s credit score, income, and debt-to-income (DTI) ratio requirements on their own.
• Costs: Closing costs, appraisal fees, and other expenses add up.

Which Option Is Best Post-Divorce?

Mortgage Assumption is often preferable when:

• The current mortgage has a low interest rate that would be lost in a refinance.
• The assuming spouse can meet the lender’s qualification standards.
• There’s a need to keep monthly payments low.

Refinancing is the better option when:

• The existing mortgage is not assumable.
• The spouse keeping the home needs to access equity for a buyout.
• It’s critical to release the other spouse from all mortgage liability.

Case Study:

Mortgage Assumption vs. Refinancing in Detroit

Scenario:

A divorcing couple in Detroit owned a home with a VA loan at 3.25% interest. The wife wanted to keep the home, but the husband, a veteran, wanted to free up his VA entitlement for a future home purchase.

Challenges:

• The VA loan was assumable, but the wife wasn’t a veteran, meaning the husband’s entitlement would remain tied to the loan if she assumed it.
• Refinancing meant losing the low VA loan interest rate and increasing monthly payments significantly.

Solution:

As a Certified Divorce Lending Professional (CDLP), I:

1. Explored simple assumption options: The wife qualified to assume the VA loan, but the husband’s entitlement would remain tied.
2. Evaluated refinancing scenarios: The wife couldn’t afford the higher payments if she refinanced at current rates.
3. Negotiated a compromise: Educated all parties on how VA entitlement works. Once they understood and it was determined the husband could purchase his new home using his VA home loan benefit, with a zero-down payment, while allowing the existing VA loan to stay in place, the settlement included a timeline for the wife to refinance within two years, freeing the husband’s entitlement at a later date, while allowing her to stay in the home short-term.

Outcome:

• The wife assumed the loan temporarily, keeping her monthly payments low.
• The husband agreed to the short-term arrangement, and the wife refinanced once her income stabilized, releasing his VA entitlement.

Call to Action

For Divorcing Homeowners:

Unsure whether to assume your mortgage or refinance after your divorce? I can help you explore both options and make the best choice for your financial future. Contact me today for a free consultation!

For Family Law Professionals:

Partner with a Certified Divorce Lending Professional (CDLP) to guide your clients through complex mortgage decisions during divorce. Let’s collaborate to achieve the best outcomes!