Most likely you have had a divorcing client ask you this question. Clients today don’t want to refinance and lose their low interest rate, but they also don’t want to co-own their home with their soon to be ex-spouse either. What can we tell them?
First, just as we refer clients out to accountants, financial planners, therapists, etc., we should refer them to a Certified Divorce Lending Professional as well (“CDLP”). A CDLP is a mortgage expert who helps divorcing parties make informed decisions about their real estate assets through divorce mortgage planning. A CDLP can work with just one party or both parties. They will analyze the client’s financial situation to see 1) if it’s even possible to assume a mortgage, and 2) if that is the best option for the client.
Second, we should have basic knowledge of the mortgage assumption process to pass to a client regardless of whether they meet with a CDLP or not:
1. There are two types of loan assumptions. The first is the Legal Transfer Assumption (also called Simple Assumption). This occurs when Spouse A assumes legal responsibility for paying an existing mortgage. Many divorce agreements include a Legal Transfer Assumption provision wherein Spouse A stays in the marital house for a period of time and is solely responsible for payment of the existing mortgage. Spouse B is still on the mortgage but moves to a secondary position.
The second type of loan assumption is called a Qualified Assumption or by Novation. In this type of assumption, Spouse A assumes responsibility for both the payments and the terms of the mortgage loan. Spouse B is removed from the mortgage. This is usually what the client wants to do when he or she asks about assuming a loan.
2. No equity can be taken out in an assumption. If Spouse A needs to buy out Spouse B’s interest in the home, they will need to find an alternative source of cash to do so.
3. The terms of the loan must allow assumption. Usually you can look at the Deed of Trust or the Closing Disclosure to see if the lender allows assumption of the loan.
4. For a Qualified Assumption, the client must qualify with the lender to assume. Normally this means the client must show a history of making the mortgage payments for a sole account for at least 6 months, the property must be owner-occupied, and any child or spousal support must have been in place for 6 months. (Note that these are only examples of qualifications one might see from a lender).
Finally, we should be aware that a loan assumption is not always a better option than a refinance equity buyout. Factors such as the mortgage interest deduction will affect tax filings, which will affect a client’s cash flow. A CDLP can analyze the pros and cons of each option, and your client will ultimately thank you for helping them make the best long-term decision possible.
If you want to learn more, contact Wasserman Family Law at info@wassermanwhite.com or call our main number 410-842-1070. For a Certified Divorce Lending Professional, we recommend and frequently work with Ida S. Reis.