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How Viable is a Loan Assumption in Divorce?

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Navigating the complexities of managing "The House" has become even trickier with the rise in property values. For parties interested in retaining the house, the concept of assuming a loan might come up.

It's important to distinguish loan assumptions from refinancing, loan modifications, or forbearance agreements. A loan assumption uniquely allows an existing borrower to take over the original mortgage without altering the term, interest rate, payment schedule, or loan balance.

For instance, assuming a loan with:

  • A balance of $358,275
  • 17 years left
  • An interest rate of 2.750%

means continuing payments on that balance, for that duration, at that rate, without the option for cash-out.

In the context of a divorce where one party wishes to keep the home, assuming the existing mortgage could be a practical solution. It enables the interested spouse to continue the mortgage as is, relieving the other spouse from the debt obligation as they relinquish the ownership and residence of the marital property.

This approach can be advantageous, especially when the existing mortgage rate is significantly lower than current market rates, avoiding the costs associated with obtaining a new mortgage. However, it's not guaranteed that a bank will permit a loan assumption for several reasons:

  • Contractual Terms: Most mortgages in the U.S. are conventional loans, adhering to Fannie Mae and Freddie Mac guidelines, which typically prohibit assumptions.
  • Leverage: With two guarantors, the lender has more security. What is the incentive for the Lender to let one off the hook?
  • Market Conditions: A lender would rather have the current loan paid off and re-lend at higher current rate for a better return.

Notably, FHA and VA loans often do allow assumptions, though the assuming borrower must still qualify based on repayment capability and eligibility.

If you're considering a loan assumption to retain your house:

  1. Review your original loan documents for any mention of assumption provisions.
  2. Contact your lender to inquire directly about the possibility of assuming your loan. Be aware, though, that initial responses might be generic and not indicative of your loan's eligibility for assumption.

For any further inquiries or guidance on real property matters, let's connect.

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Dani Wolter

Cell 408-355-4222
[email protected]

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