Loan Assumption: The Aspect That Most Divorce Couples Don’t Think About

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Divorce can be challenging with all the paperwork and legal processes. Therefore, it is easy to neglect certain important aspects. One such aspect is loan assumption, and failure to address this issue can lead to financial difficulties. This is why it is important to get legal help during a divorce to help you deal with every aspect of the separation. 

Loan Assumption Explained

Loan assumption occurs when you become responsible for a standing loan while adhering to the original terms the lender stipulated. The most common type of loan assumption divorcees undertake is a mortgage. With loan assumption, you can take full responsibility for the mortgage on the home you lived in with your former spouse. With this arrangement, your former partner is no longer responsible for the mortgage repayment; their name is deleted from the loan document, and as a result, the burden falls solely on you. 

When you assume a mortgage, the payment, loan term, and interest rate remain unchanged. However, some lenders might charge you a flat rate when you assume the mortgage. If the mortgage is backed by the government, the agency might control the assumption fee. 

There are instances where the lender will ask you to buy a new title policy. In such a situation, you’ll have to pay the title company a fee to enable them to process your request. You’ll also pay the attorney fee if the title company or lender asks their attorney to review the loan documents.

Generally, the fees you pay during a loan assumption depend on factors such as the type of loan, the loan company, and the title company responsible for processing the loan assumption. Therefore, before you assume any loan, ensure that you confirm with the lender what fees you’ll be paying. This will help you determine whether you should try this option. 

Why People Assume Loans

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The primary reason people assume loans is to remove a former partner from a standing mortgage. Individuals carry out this action during the divorce settlement or after the judge grants them the home. The purpose of doing this is to protect the property’s future equity. 

The loan assumption allows you to make certain decisions about your home without consulting your former spouse since their name is no longer on the loan document. Furthermore, you can save on closing costs when you assume a loan. As such, you can sustain a favorable interest rate. 

A loan assumption that is well executed ensures that your former partner is no longer a liable party. As a result, they can buy another home without being tied down with the existing mortgage. Once the loan assumption is executed, subsequent payments will be solely on you. 

Therefore, this allows you to take another loan against the property, sell it, or refinance the mortgage without involving your former partner. You can read this article to learn more about mortgage refinancing. While assuming a loan, ensure that all mortgage documents and quit claim deeds are in your name. We advise that you consult a real estate lawyer to go through the divorce agreement, mortgage documents, and assumption documents to ensure that everything is in order and that you don’t have any trouble in the future. 

To qualify for a loan assumption, you need to have:

  • The financial capacity to repay the loan
  • A low debt-to-income ratio
  • High credit score
  • Provide the necessary documentation, including a divorce decree copy, paycheck stubs, bank statements, proof of assets, a photo ID, and a credit report copy.

Speak with a lawyer to learn more about loan assumptions. Hiring a lawyer is the best way to ensure you don’t leave any loose ends when separating.

Final Thoughts

In conclusion, addressing loan assumptions during divorce is crucial to avoid future financial complications and ensure clarity in your financial obligations. By assuming a mortgage, you remove your former spouse from the financial equation and gain complete control over the property, safeguarding your future equity. The process involves various fees and qualifications, making it essential to consult legal and financial professionals to ensure a seamless transition. Engaging a real estate lawyer can help navigate the intricacies, review necessary documents, and avoid pitfalls. Proactively managing loan assumptions can lead to a more secure and manageable financial future, allowing you to rebuild your life with confidence and stability.