In a divorce, the marital home is often one of the most valuable marital assets that the parties have. Typically, the parties also have a mortgage on the marital home with a balance due and owing.
To resolve a divorce with a martial home, there are typically three possibilities in terms of what happens with the marital home. Either the husband retains the home, the wife retains the home or the parties sell it.
In the first two scenarios, the mortgage balance is still due and owing. If the marital home was bought during the marriage, the likelihood is both husband and wife are listed as debtors on the mortgage.
As part of the divorce settlement, the party keeping the home in divorce typically is responsible for making the mortgage payment. They also make all the utility payments.
One important piece in terms of resolving issues with the marital home is removing the name of the spouse who is not keeping the home from the mortgage. This is critically important in most cases to ensure that the credit of that spouse is protected in case the mortgage payment is not being made. It can also help ensure that the spouse not keeping the home has the ability to get the credit to buy a home of their own.
Many are familiar with how to refinance their mortgage to remove the name of the spouse who is moving out in a divorce. However, when a refinance takes place, closing costs come into play that can eat into the equity. The closing costs of a home-refinance generally include credit fees, appraisal fees, points (which is an optional expense to lower the interest rate over the life of the loan), insurance and taxes, escrow and title fees, and lender fees.
If the party keeping the house has good enough credit, they might consider an assumption agreement versus a refinance. By doing a refinance agreement, the party keeping the house does not lose equity through closing costs. At the same time, they are able to get the spouse who is not keeping the house off the mortgage.
An assumption agreement also allows the party retaining the house to keep the existing loan rate, repayment period, principal balance and other terms intact. The rights and obligations of the original loan are assumed by the party keeping the house without a new mortgage being created.
Having said that, not all mortgages are assumable. However, government-backed loans, like FHA, VA and USDA loans, will generally allow for assumptions. For any party going through a divorce who is considering an assumption agreement, it can be critical to speak to the loan agent and/or mortgage company.