Rising interest rates, coupled with the fact that almost everyone either bought or refinanced their homes at historically low interest rates, are adding another layer of complexity for divorcing couples. Rents have also increased dramatically leaving one or both couples with the problem of not being able to afford rent and not wanting to lose an affordable home due to the low, affordable interest rate on the mortgage.
Can your home mortgage be assumed? A “qualified assumption” is when a purchaser (one spouse) agrees to take responsibility for both the payments and the terms of the mortgage loan. In this scenario, a new mortgage contract will then be created that releases the seller (the other spouse) from all mortgage loan obligations.
Where can you find if your mortgage is assumable? Check the closing disclosure and the mortgage note. An assumption is not allowed if there is subordinate financing in place, such as a HELOC. In addition, the spouse who wants to assume the loan still must qualify.
Currently, most banks will not allow assumptions of their loans. The main reason is because they do not want to hold a mortgage on their books for the next 30 years at those historically low rates. It’s business. However, it never hurts to ask. Beware though that sometimes the mortgage holder will say it’s possible only to bait and switch to a higher rate.
The good news is that FHA, VA, and USDA loans are typically assumable loans. Be aware though that a VA loan attaches to the service member so if the spouse assuming the loan is not a veteran with sufficient VA home loan entitlement, the veteran’s entitlement will stay attached to the existing VA home loan until it is paid in full, possibly limiting the veteran’s options on future VA home financing.
Assuming any loan can take time, so this is something that should be investigated and addressed early in the divorce process so that it is known if this option is eliminated or, if it is possible, what steps need to be taken to assume the loan as soon as possible.