Divorce inherently brings about emotional and financial complexities, especially when shared properties like a home are in the mix. You may be asking yourself, “Can I take over my mortgage in divorce mediation?”
In California, one avenue divorcing couples might explore is loan assumption: a process that allows one party to take full responsibility for an existing mortgage without the need to refinance.
Learn how loan assumptions work from our expert mediation team.
Types of Loan Assumptions in Divorce
For a loan to be assumable, the mortgage documents must allow, first, for the property transfer by sellers – the current mortgage holders. Second, the mortgage must allow for the loan to be assumed by a purchaser of the property attached to the mortgage. When this occurs, essentially, the person who purchases the property steps into the place of the seller, becoming solely responsible for the remaining balance of the mortgage.
We typically see two types of loan assumptions: legal transfer assumptions (simple assumptions) or qualified assumptions.
For simple assumptions, one person steps forward to make payments on the mortgage and the other person steps back, becoming more of a co-signer without needing to make payments. The person in the back can still step in to pay off the mortgage if needed and remains liable if the payments are not made. In qualified assumptions, one party becomes responsible for both the payments and the actual mortgage terms, while the other is released from both.
Why Take Over the Mortgage?
But what exactly drives the appeal of loan assumption during a divorce? For starters, loan assumption can be a strategic move when the existing mortgage has a particularly favorable interest rate. By assuming the loan, one party might avoid the higher rates prevalent in the current market. Additionally, there’s the benefit of sidestepping the often-significant costs associated with refinancing – think of application fees, appraisal costs, and more.
Beyond these financial incentives, keeping the family home can offer emotional stability, especially when children are involved or when one party has a deep connection to the property.
How Mediation Can Help with Mortgage Loan Assumption
The path to loan assumption isn’t without its obstacles and considerations. Notably, just because one spouse is ready to assume the mortgage doesn’t guarantee the lender’s approval.
You can find this out by going back to your original closing disclosure or mortgage note and reviewing what the assumption section allows. Moreover, the spouse taking on the mortgage in a qualified assumption may need to demonstrate creditworthiness and meet other criteria set by the lender. Ensuring that the non-assuming spouse is not held financially liable for the mortgage in the future is paramount. This release of liability protects them from repercussions if the assuming spouse defaults.
Another critical aspect to consider is the whole of your property division agreements. Given that California is a community property state, when in mediation, we discuss equitability as much as equality. This division might mean the spouse taking on the mortgage could get a larger share of other assets or benefits to balance things out.
Try not to consider every option dollar-for-dollar. Instead, recognize the opportunity costs of certain choices, and how they may impact your overall bottom line down the road.
And of course, always be cautious about potential pitfalls. Some mortgages might have due-on-sale clauses. This means the loan could become due in full upon the property’s transfer unless you follow the correct steps for an assumption. Therefore, professional advice is invaluable. Whether it’s the guidance of a family law mediator or attorney, a financial counselor, or a mortgage expert, their insights can streamline the process and help avoid potential missteps.
Ultimately, open communication between both parties will be instrumental in ensuring the process benefits everyone involved.
In conclusion, while divorce introduces various challenges, understanding options like loan assumption can pave the way for smoother transitions and informed decisions.
Let us help you through these steps by giving you the information you need and the guidance you deserve. Contact West Coast Family Mediation Center to schedule your free and confidential consultation with a mediator.