Divorce Mortgage Loan Assumption Guide | Scott Levin & Tami Wollensak

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Hey everyone, this is Scott Levin. I am a mediator and family law attorney in California. And since the rates have really gone up over the last, I don't know, year and a half or 2 in terms of mortgage loan rates, more and more of my clients are trying to figure out, you know, how to assume a loan on a primary home So that one party can own the house without having to refi the loan. So basically, at the end of the loan assumption process, one person's the owner and only they are on the loan, and the other person, their former spouse, is no longer attached to that loan in any way, and they keep the loan rate that they had originally. So a very different process than refi. A loan, which obviously resets the rates. And I am joined today by Tammy, who is an expert in this field and helps lots of people understand loan assumptions. And I guess, Tammy, I've talked long enough. Tell us, how does someone know, or what are the ways for them to know that if they can assume a loan?

Yeah, thanks, Scott. This is such an important topic and one that I get literally every time somebody jumps on the phone with me. They might not know that word assumption, but exactly what you said. That's releasing one party from liability on the loan itself and allowing them to keep the terms. So they asked me, can I assume my mortgage? I cannot tell you whether or not you can assume your mortgage. Here's the thing: every mortgage servicer, the person that you write your mortgage payment to, that person, that entity, that company is the only one that can tell you if your loan is assumable. You cannot call your loan officer. A lot of times they don't even know. You need to call the servicer. So call them, and then you say, here's the thing. The key is I am going through a divorce. That's the trigger to sometimes servicers allowing this to happen. So that you say, I'm going through a divorce. Is my loan assumable? They're going to say yes, or they're going to say no. And then you're going to know whether or not— how— what the next steps are.

You know, it's interesting in my practice, though. If they say yes, that doesn't mean that they're saying it will happen. They're saying it's possible it can happen.

It's a possibility. Yeah.

As a divorce mediator, when I'm working with both sides to a divorce and helping them arrive at settlement terms, Oftentimes one person is who wants to assume a loan. We have to basically project forward what the agreement terms are going to be if that happens.

Yes.

But at least in California, the loan assumption process really doesn't get started. They don't let you apply until you have a signed settlement agreement. So it's kind of like you have to have option A if this happens, but then you have to have option B in case it doesn't, because you won't know if it will or won't. What are some of the factors that are most important to it? Is there a set of factors that are more important to institutions allowing an assumption?

Well, it is what's called a qualified assumption. So if you have 2 people that originally qualified for a loan with both of their income, both of their assets, both of their credit, and now you're going down to one person, they want— the lender wants to ensure that that one person can carry the loan. Carry that debt, right? And that they're not taking more risk by eliminating or releasing liability from that other person. So they're going to make that person go through a set of qualifications. So if you have any credit issues, if you're going to be receiving support in any way or capacity, if you are not sure if you if you have any contingent liabilities, meaning liabilities that you might be taking on or other liabilities since you took out the loan. All that stuff's going to come into play. So having a Plan B is absolutely critical in this situation, is to not just saying, oh yeah, my loan is assumable. You have to be very comfortable with the fact that you're going to qualify to do that or have a Plan B for sure.

Is there an option when you do a loan assumption to pull out any equity as part of that process?

Absolutely not. And this is really what's really important. There is some statistic out there, I wish I could quote it, but more people have more equity in their homes today than in decades, right? There's more home equity that's available, and that's really the asset. That's the amount of money that people are negotiating. So for quick numbers, let's say you own a home, it's worth $1 million. I'm saying this because it's here in California, right? So a million-dollar home with a $500,000.

I'll tell you what it used to.

There isn't anything other than that. A million-dollar home, $500,000 loan balance. You're negotiating $500,000, right? That's the asset, the equity in the home. If you're assuming the mortgage, all you're doing is taking on the current debt of the $500,000. You have to negotiate that other $500,000, maybe $250,000. And $250,000, whatever that ends up being, however that's negotiated, you have to take care of it another way through either other assets, you know, some, some other version of taking care of that. You cannot roll any of it into a new mortgage.

Does the person who's coming off the loan in an assumption process have to sign any paperwork?

Yes, when they are— when you are When somebody is assuming that current debt, then they're releasing liability of the other person. They're also releasing their ownership interest in the current home. So they're quitclaiming off the deed. So they're saying—

Okay, if the deed isn't— if the deed still is in both parties' names during the assumption process, the institution will prepare that paperwork?

They don't really prepare it, but they want it recorded. Yes. Yeah, they'll have— you usually have A real estate attorney or, or somebody prepare the deed itself. But it does need to be recorded that this person is not only releasing liability or releasing liability of the mortgage, but releasing their ownership interest in the home as well.

So we've talked about how it happens. We talked about, you know, some of the You know, the processes for doing that. I guess my next question is, what are some of the pitfalls that might exist in arriving at a loan assumption?

So I tell people there's 3 things that they really need to be— ask questions and be comfortable with. Do I qualify? It would be number one. Is it going to— am I going to be able to qualify for this assumption? Number 2 is, what are the costs and the fees that come along with this? I've heard upwards of several points, and a point is 1% of the loan principal balance. So in one person's instance that came back to me, I try to get a lot of information around this. They wanted 3 points to do this, and it was going to cost that client $10,000. So it was not— and this is out of pocket. This cannot— you're not getting a new loan. So it's not like these things can be rolled into a new loan. This is a check that they wanted upfront.

I guess there's no competition, right? You're either getting an assumption from the current institution or you're not.

That's it. Yeah. So they have their own set of parameters, guidelines, and fees. And then what's the timeline? Because you don't want to put in your settlement That you're gonna do this in 60 days, 90 days, if they're waiting 6 months to do this. And I know some large banks that say it's a 6-month process. So make sure you don't put that you're gonna do this in 90 days if it's gonna take 6 months just to find out.

And, you know, that's also something that if you're working with, you know, in divorce with an attorney or mediator, however you're processing it, you have to hire Someone that really has genuine expertise and experience, because that comes up all the time in my practice where, you know, one person wants off and they're negotiating a buyout and they're really focused on the money, right?

Yeah.

And when they're going to get it. And, you know, that's part of the negotiation. But then in terms of, you know, when they're coming off the loan and when they're coming off title, I often am saying, hey, I know you want to do it in 30, 60, 90 days, but we can't put anything in this Settlement agreement that's enforceable by by the courts, that that's going to trigger the end date prior to when I know that it's going to the assumption is going to happen. If the assumption I know is going to happen after the end date that we're putting in, that's called a bad deal for everybody.

One hundred percent. I see it all the time, Scott, and it's really tragic. I had somebody that come to me that was trying to do this process, and she was receiving support, and it was a six-month waiting period. By the time she'd been told no by the servicer. She also didn't have the amount of continuance that me as a lender that I need in order to use that as income. So the only other option that was in her settlement was to sell. So it was either assume it or you have to sell. So she had to sell.

And was she— was she considered the sole person at that point, the owner, or were they both owners?

She was. In their settlement, it was listed that she would assume the loan By a 6-month period of time and that she was the sole owner, that she would have to split the proceeds, though, from the sale. Oh, man.

Well, there's lots of stuff.

It was a bad deal for her in general.

Yeah. Well, listen, I think there's a lot that we could go into in greater detail about this loan assumption. You know, the primary home is often the biggest piece of the pie when you're going through divorce. And the reason that we wanted to discuss this today, Tammy and I, is because loan assumption is a unique option. It's something that is available to many people, but it does take a level of planning and guidance and expertise to, to kind of think through. And there's no doubt that Tammy has all of those things. So I encourage you to reach out. We're going to put all of our information in the description here. Tammy, any last words?

No, I think that being a better— making a better informed decision regarding this is going to be— give people peace of mind as they move forward in their next chapter. Absolutely. So thanks for having me. I appreciate it.

Thank you. See you all soon.

See ya.