This article is part of a 5-part series on what divorcing couples might do when faced with the pressing question of what to do with the family home.
This third option – assumption of the loan — serves as an alternative to refinancing. Some mortgagors allow one spouse to assume the loan. A “loan assumption” is sometimes called a mortgage transfer or mortgage reassignment.
With a loan assumption, one spouse requalifies for their existing mortgage on their own based on their assets, debts and credit score. The other spouse will be released from the mortgage. That is, you do not qualify for a new mortgage – you simply assume the existing one. There is typically no appraisal required and there are fewer closing costs.
Advantages of a loan assumption include keeping your mortgage at its original terms and—perhaps most importantly—your existing interest rate. You may also secure a clean financial break in which one spouse assumes full responsibility of the mortgage while the other is able to walk away. However, because a loan assumption does not involve a cash out component, alternative arrangements will have to be made to pay out the departing spouse’s equity stake. You may need to swap assets or look into a home equity line of credit.
Importantly, a loan assumption is only permitted in certain cases. Generally speaking, government-backed loans — such as FHA or VA loans— may be assumable. Most conventional loans are not assumable because they contain a due-on-sale clause. This clause permits the lender to demand full payment of the loan amount upon sale of the property. Loan assumptions may be possible with an adjustable-rate mortgage (ARM). You should check with your bank.
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If you have questions about whether what to do with your family home during divorce, contact Jim Robenalt, an experienced mediator and lawyer, to discuss your particular circumstances. To schedule a free consultation call, you can get in touch with Jim by calling (216) 206-9789.