Keeping a House During Divorce: Can You Simply Take Over the Mortgage?

September 6, 2022

Let’s face it, selling a house in California can be an expensive and time-consuming undertaking. And now that interest rates are on the rise, buying a new home has become even pricier for couples who are looking for ways to reduce the economic impact of divorce. As the most valuable asset most couples own, the house will be the first thing that comes to mind—and taking over an existing mortgage will seem like a great way to save money, reduce stress, and allow one spouse to keep the home they love so much.

But can one divorcing spouse simply assume the existing home loan?

In some cases, they can. We’ll look at three common scenarios below, but first, let’s go over a few things every buyer should know before assuming a mortgage loan:

Loan Assumption Pros

  • No closing costs
  • Keep your current interest rate
  • Keep your current loan’s maturity date
  • Keep your existing monthly payment

Loan Assumption Cons

  • You will undergo a rigorous application process
  • You may have to pay loan assumption fees
  • You may have to pay title fees
  • Assumptions can take up to six months to complete

More things to know about loan assumptions and divorce:

  • A loan assumption allows a borrower to take over an existing loan, keeping its existing terms. It is not a refinance or a loan modification; however, the borrower will still have to complete a rigorous application process and prove their ability to repay the balance of the loan.
  • Loan assumptions can take up to 6 months to complete, so borrowers must make sure their assumption terms and timeline meet the requirements of their divorce decree.
  • Not all loans are assumable; the original loan documents will spell out in clear language whether or not the loan qualifies. Most FHA, VA, and USDA loans are assumable, most conventional loans are not.
  • If a non-veteran spouse assumes a VA loan, the veteran spouse could lose their VA entitlement to purchase another house.
  • If a borrower is able to assume a loan, they must file a quitclaim deed to remove the other spouse from the title.

Here are three common divorce scenarios and their best options for dealing with the house:

Scenario 1:

This couple has plenty of cash on hand and/or a lot of assets to disburse. Selling the house isn’t strictly necessary because there are enough assets to split equitably without cashing out the family home. The home has a great interest rate under 3%, there are only about 7 years remaining on the VA loan, and the couple has 3 school-aged children who are thriving in their current school district. Interest rates and home prices are rising fast, and there’s a widely shared assumption that it will be a long time before the area sees favorable purchase terms that come anywhere near the terms the couple enjoys now. Each spouse could comfortably afford to pay the remaining loan balance on their own, but one spouse simply wouldn’t be able to qualify for a new house in today’s climate without moving much farther away from the children.

In this scenario, a loan assumption may be ideal if the lender allows it.

Scenario 2:

This couple has plenty of savings and investments, but no physical assets aside from two cars and their primary home, which they purchased with a conventional mortgage. Each spouse has great credit and earns more than enough income to make the monthly house payments on their own. The couple has one child who is thriving in the school district, and one of the spouses has family living nearby to help with childcare. The couple realizes interest rates are on the rise, but they don’t want to keep any joint assets. They would, however, like for their child to continue living in the home.

The best bet for this couple would likely be a buyout.

Scenario 3:

This couple has two 5-year old cars, a few thousand dollars in savings and investment accounts, and a house currently valued at $1.4M that was purchased with an assumable FHA loan. The mortgage terms are favorable, but neither spouse can afford to make the mortgage payments on their own. There are 20 years remaining on the loan.

In this scenario, neither spouse would qualify for a mortgage assumption or a buyout, so the best option for this couple would be to sell the home.

As you can see, a lot has to fall into place before a loan assumption can come into play. Most couples will fare better with a buyout or a straight sale of their home, especially given the lengthy timeline associated with a loan assumption.

In Summary

Loan assumptions aren’t for everyone. In fact, I would argue that assumptions are the exception, not the rule. If you think a loan assumption is right for you or your divorcing client, contact a mortgage professional early in the process to find out what documentation they’ll need and confirm that an assumption is possible on the loan in question. I can refer you to a great Certified Divorce Lending Professional if you need help.

If you’d like clarification or want to know more about how a CDRE can you help you resolve property matters in divorce, please reach out. I'm always happy to help.

650-550-8646

Shannon Rose
CDRE, SRES, CDPE, CLHMS, GPS
DRE# 01422955
Los Gatos, CA
1-650-550-8646
DivorceRealtor@RoseGroupRE.com

BAY AREA DIVORCE REALTOR®

SHANNON ROSE/ROSE GROUP
DRE #01422955

KW BAY AREA ESTATE
DRE #01526679

16780 LARK AVE.
LOS GATOS, CA 95032

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