Have you just concluded your divorce proceedings, and are you thinking of loan assumptions? Well, you are not alone. Many divorced people think of the assumption of mortgages after divorce, especially if they have custody of the children.
Keep reading to know more about loan assumption and how you can qualify for it.
Definition of Loan Assumption
Mortgage assumption divorce is when one party takes over the existing mortgage instead of getting a new one. However, please note that loan assumption isn’t the same as loan refinancing or modification.
It simply means that one party will assume the loan responsibility without any modification regarding the interest, payment term, or amount to be paid. Also, your ex-spouse’s details will be deleted from the mortgage document, meaning all the burden of paying is yours alone.
Some lenders may instruct you to buy a title policy. If this is the case, you must pay a processing fee to the title company and advocate fees. Before assuming a mortgage after divorce, talk with the lender first so that you may know what you are getting yourself into.
But do not let this scare you. Loan assumption divorce comes with several benefits, such as:
- You won’t undergo the lengthy process of applying for a new mortgage
- The existing interest rate might be less than the rates a lender will ask if it were a new mortgage.
- The entire amount you will pay will be less than what you could have if you had taken a new mortgage.
How Does Loan Assumption Work?
For the loan assumption to succeed, you need to fulfill a few conditions. First, complete the loan without assistance from your ex-partner. You must have the required resources to pay back the loan. However, if you rely on alimony to pay the loan, inform the lender before assuming the loan.
Your income-to-debt ratio should be high. If it is vice versa, you will not qualify for loan assumption. This means your credit score should be high for a successful loan assumption.
Talking with your lender beforehand is crucial to knowing if you qualify for the loan assumption. If everything is in order, you are required to provide the following documents to the lender:
- Documentation/ID
- Divorce decree copy
- Statements from the bank
- Proof of any asset you own
- Paycheck stubs
- Credit report
Any other document your lender asks for should be immediately provided to ensure a smooth and fast loan assumption process.
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What Type of Loan Is Not Assumable?
It is vital to take note that not all loans can be assumed. Talking with your lender is always essential to getting the necessary information.
Conventional loans are an excellent example of loans that cannot be assumed. Loans that allow loan assumptions include:
- VA loans
- FHA
- USDA
Another thing to keep in mind is the complexity of VA loans. Suppose you are a veteran with a VA mortgage for your house. You risk losing your VA benefits if your non-veteran ex-partner wishes to take over your loan.
You will, therefore, be unable to apply your VA benefit toward acquiring a new loan. You might be unable to access the money until your partner fully pays the debt. In this case, you should consider loan assumption alternatives such as:
- Home Equity Line of Credit (HELOC)
- Refinancing
- Buy a new home
To be on the safe side, once the loan assumption process is complete, ensure you change the name of your house deed by removing that of your ex-partner.
Conclusion
Loan assumption is when one person transfers loan responsibility to themselves and releases the other party from liability. To qualify for loan assumption, they must talk with their lenders beforehand. Your income-to-debt ratio and credit score must be high, and you must be financially stable to take over the loan responsibilities.
The required documents to process the loan assumption are an ID, divorce decree copy, statements from the bank, proof of any asset you own, paycheck stubs, and a credit report.
