Can I assume the mortgage after the divorce? with Jody Bruns

Speaker 1 (00:05):

Welcome. You are listening to Divorce Literacy, the show that addresses issues of divorce, real property and divorce mortgage planning. I'm Jodi Bruns, the president and founder of the Divorce Lending Association and the C CD L P Certified Divorce Lending Professional Designation. And today we are talking about mortgage loan assumptions. Incident to divorce, addressing that hot question right now with the rise in mortgage interest rates, can I assume the mortgage once my divorce is final? And the answer to that question is maybe, probably not, and it just depends. Now, this might be the first time, you know, you're hearing about the C D L P or the Certified Divorce Lending Professional designation. So I just wanted to very quickly give you some insight on the value A C D L P can bring to your divorce team as well as, you know, a current situation with any of your divorcing clients.

(01:09):

One of the most probably the, to be quite honest common question we get is how is the C D L P different than a traditional mortgage professional? And I say, you know what, that's a fair, you know, question, but I have a very simple answer. It's the same as you. Okay? You know, if you're A C D F A with us today, how does that make you different than another mortgage or financial advisor? If you are an attorney, if you are a family law attorney, how are you different than a bankruptcy or a business attorney? You know? And if you think about that question, you know, it's what makes us different is our background knowledge in training in divorce and c DLPs, you know, they're not simply mortgage professionals who work with an occasional divorcing client. C DLPs are divorce professionals who work every single day with divorcing homeowners and they just happen to offer mortgage financing, divorce mortgage planning.

(02:20):

And the fact that they do that every day, sometimes all day long you can start to recognize what a significant value that they're gonna play on that practice. So, getting into our content today we all know that mortgage interest rates have gone up, right? It's been in the news for almost a year now. Probably one of the main factors, you know, is that interest rate increase. And that's why we're even here today discussing, you know, what options are available for our divorcing clients regarding loan assumptions, right? If you look at this, and I thought this provided some good context here, is we started the year 2022 with an average 30 year fixed rate, right around three and a quarter percent. Okay? And you can see on this slide that about mid-January this time last year, actually, we started that steep increase and we ended up rounding out last year, 2022 with an overall average rate of 5.26%.

(03:36):

Cuz you can see it went up, down, up, down typical interest rate <laugh> movement. But as of just last week, January 12th, 2023 the average 30 year fixed rate was at 6.33%, you know, almost double this time last year. So again, it's obvious as to why we are having this conversation today. And if you are saying, okay, well, interest rates have gone up, et cetera, how does this rate change really impact homeowners? Okay? If you look at this, I just took a simple loan amount of $300,000. If we used the interest rate from this time last year, let's say a three and a quarter percent interest on a 30 year fixed, the principle and interest payment on that $300,000 mortgage was $1,306. Okay? If you take that exact same mortgage amount, and now let's say they're going through a divorce and they have to refinance at today's rate of 6.33%, that new principle in interest payment has gone up to 1863 a month.

(04:59):

Okay? That's a payment shock of $557. So I have found that working with divorcing homeowners that their primary concern in divorce might not necessarily be the interest rate, but rather cash flow. Okay? And if you take into content or context even that, you know, a good chunk if not half of their household income is gone, you know, once the other spouse vacates that money's gone. You know? So it makes obvious sense to us, right? That there is a significant focus on cash flow and payment. So of course, you know, given this, you know that they've lost a good chunk of income for their household rates have gone up, they're watching their money, you know so it makes that they would want to look at all of their options in, you know, taking into what they're gonna do with the existing mortgage, including keeping the same mortgage in place at the interest rate they may have.

(06:13):

You know, and I can bet you, I would bet you that the majority of homeowners, you know, they took advantage of the interest rate interest rates over the last couple years. So more often than not, they are going to have that lower 30 year fixed rate around 3%. Some of 'em even lucked out, and they have a 30 year fixed in the twos. Nobody wants to go up to sixes, right? So let's look at, you know, a loan assumption and kind of break down the different types and the options available to our existing homeowners. So just in definition, a loan assumption is basically you have the original person who is obligated on the mortgage, whether it's a sole individual or a married couple. They are then transferring responsibility of making that mortgage payment to another party, okay? You have different types of loan assumptions.

(07:16):

You have, you know, where one person is going to assume responsibility for making the payment, and then you have a situation where the mortgage company is going to actually transfer the loan itself into the other party's name thereby assuming the loan, right? Well, there are actually two types of loan assumptions, all right? And we're gonna talk about each one of these types. You have what is called a legal transfer assumption, also known as a simple assumption, okay? This type of simple assumption is where you have one party who is going to assume legal responsibility for making the payment, okay? The original mortgagee, the person who, you know, was either on the loan with their spouse or individually, they're still going to stay on the mortgage, okay? They just are going to move more into like a co-signer role where they're in a second position to being responsible for making that mortgage payment.

(08:32):

Okay? And we'll break down this you know, option, the simple assumption here in a moment. You also have a second type of loan assumption, okay? And that is called the qualified assumption, also known as by ation, okay? It's more the legal term for it. In a qualified, this is where one party assumes responsibility for not only making the monthly payment, but they ex they assume legal responsibility for the terms of the loan, okay? Only when you do, or you are, you've qualified for that qualified assumption, will there be the option for a full release of liability by the original mortgage e by the lender. Okay? So those are our two types of loan assumptions, and I wanna break down those for you so you have a better understanding of what options may be available for your divorcing homeowners. So let's get this, you know, out of the way, right upfront, if your divorcing clients are going to need to do an equity buyout, okay?

(09:51):

Where they're going to take equity out of the house in cash form to acquire, if you will, the ownership interest of their other spouse, you cannot do a loan assumption, okay? You cannot take extra money out of that, the equity in the home and keep the existing terms of the mortgage, okay? So if your divorcing client is going to try to do a loan assumption and they have to, you know, provide equity in cash form, et cetera, to their divorcing or their their spouse, you are going to have to equalize that equity elsewhere on the marital balance sheet, okay? And unfortunately it's probably more often the case than not that you don't have additional assets, you know, to offset that equity acquisition. So just out of the gate, if your divorcing client has to pay, you know, or somehow buy the equity ownership out of their other spouse, don't even look at doing a loan assumption, okay?

(11:03):

It's not gonna be a viable answer. So what makes a loan consumable? Okay? Basically, it depends on the terms of a loan itself as well as the willingness of the current lender, all right? You're going to be able to see if an existing mortgage loan is consumable by looking at the existing mortgage documents. So if a loan is consumable, you'll find the assumption clause in various instruments, okay? Documents. So what you need to do the very beginning and your C D L P can help you with this. You need to ask your clients for a copy of either their existing mortgage note or the deda trust, okay? Within, and, and again, it just kind of depends on the loan that was taken out, what, which document, any type of assumption notice is gonna be included in. However, within these documents, whether again, it's the note or the deed of trust, you'll find what is called the alienation clause, okay?

(12:18):

It's also, or probably more commonly known as the acceleration or the due on sale clause. Okay? What I did here is I actually copy and pasted this alienation clause out of a current mortgage note that I had access to. And what it states in this alien nation clause is that if any interest in the secured property is transferred to another party without the consent of the lender, the lender has the legal right to call the new do the note due and payable right now, okay? They're gonna give 30 days notice to the original mortgage e that they have to pay off the loan right now. Okay? So I'm sure you know in the next section that I have highlighted in blue your eyes are gone, you know, have gone to the part where it says that an acceleration may sometimes be prohibited by law <laugh>.

(13:27):

And I'm gonna discuss that here shortly as well. But you'll also see that the alienation clause includes verbiage that says the lender basically has discretion to allow for an assumption, okay? And what I wanna say here is that discretion is key, okay? They don't have to, they have the option to. Okay? The other document that I think, well, I'm, you need to ask for from your client is their closing disclosure. All right? This is a document that they re they receive when they close on their existing mortgage that outlines all of the fees, the interest rate the payment, et cetera. On the last page of this cd, this closing disclosure, you will find an assumption section, okay? And the box is either gonna be checked that an assumption is allowed under certain conditions, <laugh>, or you are going to see the box that says, this loan will not allow, or the lender will not allow assumption of this loan.

(14:44):

Okay? Pay attention to this because what it says, and you gotta watch the verbiage in all of our documents, is that the lender will not allow a loan assumption on the original terms, okay? This is where discretion comes into play. They can allow for an assumption, but guarantee you it will not be the original terms. Okay? And that's pretty much the reason, you know, we're we're trying to do an loan assumption is to maintain those current terms. And I get it, you know, you have a homeowner and their primary question is, where, what does the lender care, you know, if I am paying the loan just like the original borrower did, why won't they just allow me to assume the mortgage, you know, and maintain those existing terms? It's plain and simple, okay? And it's called business, right? It doesn't make sense for a lender who's in the business of mortgage financing, right?

(15:51):

To hold a lo hold a note at 3% over 30 years when the going rate is double that, okay? And if that current lender is maybe going to sell or transfer the mortgage to another servicer, it's obviously not as valuable on the secondary market. The other thing that makes sense as to why they wouldn't just allow somebody else to make the payment on a loan, they've already, you know, put in place is that original borrower went through a qualifying purp or process. You know, we had to establish credit worthiness, we had to establish their ability to repay. You know, so again, it's discretion. It's up to the lender as to whether or not they're gonna allow this or not. So I wanna break down, you know, those two types of assumption options, whether it's the legal assumption or the qualified assumption, and I wanna focus on the legal, you know, the prohibited basically by law of the acceleration, okay?

(16:58):

A lender cannot accelerate the due on sale clause if the transfer of property is what's called an exempt transfer. Okay? that exempt transfer is, you know, probably the most two common legal transfers or exempt transfers is in the event of death. So, you know, say the parent dies and the children inherit the house which has a mortgage on it, those heirs can continue to make the payment and the lender cannot accelerate the due on sale clause because it was an exempt transfer. Divorce is also an exempt transfer, okay? You are transferring the, the ability to make the loan payment, okay in a divorce. So let me break this down for you. Many of you may already be familiar with the Gar Saint Jermaine Act of 1982. What this act does is it prohibits a lender from accelerating the due on sale clause in the event of an exempt transfer, such as, again, death or divorce.

(18:18):

 What happens in a divorce situation that I see on a regular basis is one spouse is retaining the marital home. They are going to assume legal responsibility for making the mortgage payment, okay? They are, they become what is known as a successor of interest, okay? They now have an interest in this property. They awarded ownership almost in full, you know, via the divorce settlement. And because of that transfer, they can make this mortgage payment without refinancing it. And this, this comes into play whether they were a co-borrower with their spouse, and now they are the other spouse transferred their ownership to the spouse who's retaining the marital home, or maybe the spouse who is going to retain the marital home wasn't even on the mortgage, right? They were never went through the qualifying process or anything, but now they were awarded the marital home and they are assuming le legal responsibility for making the mortgage payment as a successor of interest.

(19:34):

So even if your bar, if your divorce and client is not on the mortgage to the marital home or other real property, the lender cannot accelerate the due on sale clause because it's an exempt transfer. Okay? the key thing though is you have to notify the existing lender that you are exercising your right under the garden Saint Germaine Act. You know, you need to notify them that on this date I was awarded ownership in the property secured by this mortgage. Note, and here's a copy of the divorce settlement agreement or the orders transferring ownership. Now, here's the thing though, is we all know the real word or meaning right behind. Assume you are assuming legal responsibility for making the payment, okay? Under the Gar Saint Jermaine Act as an exempt transfer, you are not doing a full qualified loan assumption where the lender is releasing the liability of the other party.

(20:45):

Okay? so I, I always tell our c DLPs to be very careful that you are not, you know, misunderstanding or misinterpreting the asum, the assume part of that, right? You can assume legal responsibility by court order for making the mortgage payment. That does not mean you are assuming the loan and the other party is being released of their legal obligation to the lender. Okay? the other thing that I wanted to point out regarding, you know, the, the exempt transfer, et cetera, is that, and it's probably the biggest argument that I hear is that with a legal transfer assumption, you know, there's this myth that the vacating spouse is not going to be able to qualify for new mortgage financing because obviously they're leaving the marital home, they have to have a place to live. And so the, you know, this big issue becomes, well, I can't buy my own house if I'm still on the loan to the marital home.

(21:55):

Therefore, you either refinance it or sell it, and we'll both purchase, okay? When you involve you know, A A C D L P in the divorce process, in the settlement process, they're gonna be able to work with you to make sure that the verbiage is correct in the settlement agreement so that our our, the other spouse who's vacating and his, their name is still on the mortgage, that we're going to be able to omit that liability from their mortgage application. And when we make sure this verbiage is correct in the settlement agreement, it becomes a court ordered assignment of debts. So we're assigning legal responsibility for making that payment to the other party, okay? It's also known as a contingent liability. Yes. Somebody else is now legally responsible for making the payment. However, if they default, I'm still on the hook, okay?

(22:56):

 Because again, in a simple assumption or that legal transfer assumption, you are not being released of the liability, okay? So that's what I wanted to share with you on the simple assumption is that you can transfer legal responsibility for making the payment to another party. And as long as that is an exempt transfer, such as divorce, the current lender cannot accelerate the due on sale clause as noted in that alienation clause. Okay? The next type of assumption that I wanna talk about is what's called the qualified assumption, okay? In a qualified assumption, in contrast to the simplest assumption is that the person who is now going to be legally responsible for making the mortgage payment is also going to be the new borrower, okay? They're going to have to, you know, qualify for the mortgage, they're gonna have to establish credit worthiness, they're gonna have to be able to go through an entire application process basically with the existing lender.

(24:13):

And then if that lender, you know, grants the full loan assumption, the other party will then be released from their legal obligation to the lender. Okay? again, qualified assumptions, you know, you're going to find out whether or not it's available. Is it an option? Discretion, you know, it's always an option, you know, to at least look at whether or not you can do this full qualified assumption. What types of loans are available, you know, to do a qualified assumption, typically government backed mortgage loans. You have your F H A, you have your va and you have U S D A. Typically all government loans have an consumability feature, okay? You're either going to see in your client's loan documents, there's gonna be a writer or an amendment which is going to basically cancel out or identify and define what assumption features are available that are gonna override that alienation clause.

(25:29):

That's gonna be noted in the mortgage note or on the deed of trust. Okay? just a quick assu or note on if you have a client and they wanna do a VA assumption, if the person or the party who is assuming responsibility, you know, and they're qualifying with the existing lender, if they are not a veteran and they do not have sufficient VA loan entitlement left the veteran who was the original borrower, their VA loan entitlement is still going to be in effect and attached to that existing mortgage. And that may affect, you know, or limit some of their options on obtaining future VA home loan financing while their entitlement is still attached to the existing mortgage. Okay? so again, you know, just kind of look, ask your clients, you know, what type of mortgage they have. If it's a government loan, there's a better option or more options available, if you will, for a secondary party to do a full qualified assumption and obtain that release a liability for the original mortgage.

(26:46):

E looking at, you know, our qualified loan assumptions with a conventional loan, a non-government loan this is probably, if you will, the bigger elephant in the room. What you're going to obviously do again is search the documents for the specific verbiage in that alienation clause, okay? If your client has an adjustable rate mortgage, okay, which has been making a comeback in the last year because of the interest rate hike, most as assume or adjustable rate mortgages are consumable, okay? Even though they're not government backed you need to again, read the verbiage, you know, in the alienation clause. But typically, if you have an adjustable rate mortgage, an arm once, that option to convert the adjustable rate to a fixed rate mortgage, there is no longer the ability to assume that loan. Okay? here's the thing. Remember I said on the cd that the loan is probably not consumable under existing terms.

(28:03):

That's where this discretion comes in, into play, because they have the option to allow an assumption just on different terms. So basically what they're looking to do is a brand new refinance closer, if not at market rate, okay? It never hurts to ask, okay? Even if there is an alienation clause, and it specifically says in the documents that this loan is not consumable, it's, it doesn't hurt to ask, you know the things though that I want you to make sure your divorcing clients are aware of, if they're going to approach the existing lender to see if they can assume the loan is, they still have to qualify for it. So we still have to make sure that the verbiage and the settlement agreement is going to not have any issues or conflicts with mortgage guidelines. Okay? That's number one. I will say on average, having done research, different lenders, et cetera how they're looking at and offering assumption availability is a lot of them want to see that the person who's applying for the loan assumption has made the most recent six months mortgage payments directly on their own.

(29:23):

 You know, as a basis to say, okay, well you're not gonna default. You have had the ability and the responsibility for making the mortgage payment. But think about that. You know, from what I see in the normal settlement agreement, it is saying that you have 90, you have 120 days to refinance this loan in your name. If the current lender, you know, in order to even offer an assumption is requiring that you show you've made the most recent six months payments, you are exceeding that timeline. Okay? So a lot of this stuff comes into play. Lot of lenders out there, and it's always the bigger, you know, servicers that are, you know, even offering the ability to look into assumption is they may require that you put an additional 5% down on the existing mortgage loan to bring that the balance to the value down.

(30:21):

So there's more equity in the home, so there's less risk to the existing lender. They have the ability to charge fees, you know, they can only charge reasonable fees to the, you know, to the new as sumpter if you will. But the thing is this, don't don't let your divorcing clients contact their existing lender to inquire about an assumption and think that they're going to get the existing terms. I guarantee you they're not. I mean, right here it says probably not under original terms, okay? Unfortunately, in the mortgage industry there's a bait and switch, you know, it's like, yeah, just apply, you know, we'll look at, you know, see if we can consider a loan assumption for you and, oh, you know what? I'm sorry, but we'll offer you, you know, a, a new loan at this rate, and we wanna make sure that our divorcing clients are going to go into a new loan if they're not gonna do a true qualified assumption existing payment in terms something that is gonna be in their best interest.

(31:33):

Okay? we wanna make sure that the reward is worth, you know, any re any risks, you know, that are out there. If there is existing, you know, subordinate financing, meaning there's a first and second loan on the property, you will not be able to do an assumption on a conventional loan, okay? So if your client has a first and a second mortgage, you're not gonna get an assumption if your clients, if they're existing mortgage has mortgage insurance on it, which is basically in place, if there's less than 20% equity in the property, not only does the existing lender have to approve the assumption and the new terms, but that private mortgage insurance company is also going to have to go through an approval process, you know, which could again, change the terms of that mortgage insurance rate, et cetera. Okay? Just to kind of give you an example of one of the bigger banks and how they are, you know, putting together their public, you can download it right from their website their assumption clause, this was Bank of America's, you know, it's like, yeah, go ahead, you know, apply for an assumption, we'll take it into consideration, but it's flat out says in their print that borrowers may be required to make that 5% down payment, okay?

(33:00):

And a lot of times that cash flow is not there, you know, so when you look at, you know, and you, and the home is on the marital balance sheet this is what it looks like. You know, it's not as simple as one spouse retaining the marital home or just simply selling it. There's a lot more involved in that overall picture. And, you know, the areas that I show overlapping on this visual, it's just small piece of that puzzle, you know? So even if you know your clients are going to look into their options for a loan assumption, you still need to include divorce mortgage planning into the process because again, that loan assumption is only gonna be a current fix. You know, we need to make sure that we are looking out for the best interest of our divorcing clients after, you know, the divorce is final.

(34:00):

And when they try to obtain mortgage financing in the future we need to just make sure that we're looking at the best interest of both spouse, both spouses, not just the one who's retaining the marital home and looking for the assumption. And I can promise you that A C D L P offers a very unique perspective up than other mortgage professionals who just don't have that greater knowledge. You know, I love that saying that is on here. It's not what you look at that matters. It's what you see. So I would hope that, you know, as a divorce professional ask yourself, you know, are you incorporating divorce mortgage planning into your case management? And if you're not, you know, please sit down with the local C D L P and let them lay out for you. You know, the four phases of divorce, mortgage planning, and how it can benefit you and your clients.

(35:03):

 There's, you know, A C D L P, you know, we have a much broader understanding of the process, the implications involved, the solutions and options that are available. And even if we're going to look at a loan assumption, you know, involve or incorporate divorce mortgage planning into that process because that mortgage professional, that C D L P is going to be able to, you know, compare the loan assumption options, you know, and making sure that if a qualification process is involved, that we're setting them up for more success when they apply for that loan assumption. And if not, if they cannot get a loan assumption, if it's not an offer from that lender, we wanna make sure that our divorcing clients are in a better position to deal with our home equity solutions right now and in the future. And, you know, if you need, you know, I know many of you were invited to this webinar by your existing C D L P partner but if you don't have one and you need to locate A C D L P in your area, you can visit our website@divorcelendingassociation.com and search our directory to find a very qualified partner in, actually, we're in 50 states, so all across there.

(36:29):

So hopefully, you know, we successfully pulled back that curtain for you without going into the nitty gritty of qualifying for an assumption, et cetera, but basically understanding at a high level the different types of assumptions, the, you know, options that may or may not be available to your divorcing clients. Well again, I appreciate everyone's attention. Hopefully I cleared the air a little bit. Maybe I confused you a little more. I don't know, <laugh>, if you have any questions at all feel free again to reach out to a local C D L P or, you know, you can reach out to us directly too at the Divorce Lending Association, and I would be more than happy to jump on a call and, you know, answer questions provide more content clarity, et cetera. Have a great week everybody, and thank you again for attending today.