Episode 68 Transcript: Assuming and Refinancing Mortage

In this episode, I wanted to talk to you about assuming or refinancing a mortgage, which is something that comes up when you have a shared home with your spouse, and as part of the divorce settlement, you’re agreeing to do a buyout of your spouse’s interest in the home. If you have a shared home and you agree to sell the property as part of your divorce settlement, you don’t need to refinance or assume the mortgage. It will be fully satisfied when you get the proceeds of sale. The bank and the real estate agent etc. will get paid first, and then you’ll divide the remainder. But if one spouse is planning on remaining in the home and buying out the other spouse’s interest in the home, you often will need to refinance or assume the mortgage.

So, what do I mean by that? To zoom way out, as most of you probably understand, when you own a piece of real property, it’s very common that there is debt on that property. Usually, if the property is owned by both spouses, both spouses’ names are also on the debt. That doesn’t always happen, though. It can be the case that one spouse’s name is on title to the home or the deed and both spouses are on the debt, or the reverse: that both spouses are named on the deed to the home, but only one spouse is on the debt. I won’t go into the variety of reasons why that might happen, but refinancing or assuming a mortgage is relevant when there’s a buyout, and both spouses’ names are on the current mortgage, or when the spouse who is not staying in the home, who is not retaining the home, is the person whose name alone is on the mortgage.

In either of those instances, you will need to refinance or assume the mortgage. Why? Because the spouse who is not staying in the home, if they are named on the mortgage debt, no matter what your contract says, they are still legally liable to the bank, to the lender, for the full amount of the mortgage. So in the very unlikely event that the mortgage was not being paid on time, for instance, that would impact their credit. Obviously, it would impact your credit too if you’re named on the mortgage. For the person who is not living in the home, is not retaining the home as an asset, and is not in control of whether or not the mortgage payments are made, understandably, they don’t want to have a significant exposure to have ongoing liability for the mortgage into the future. That wouldn’t be fair to them.

The other reality is that so long as their name is on that mortgage, the amount of that mortgage, the full principal balance is showing up on their credit, so it’s going to be likely to be difficult for them to obtain more credit if they’re showing that they already have an $800,000 mortgage on their name. Even if they can point to, “Article 10 Paragraph 6 says that I’m not responsible for this mortgage. My spouse is taking over responsibility,” the bank is not going to care about that.

There are multiple reasons why in a buyout scenario, the person who is being bought out and is not remaining in or retaining the property is going to want to come off the mortgage. They’re not going to want their name on the mortgage. The ways you can do that are in a buyout, by having the spouse who is staying in the home do an assumption of the mortgage in their sole name or refinance the mortgage in their sole name.

What’s the timeline? When would an assumption or refinance happen? Well, it could happen prior to your divorce. I would say it more often will happen after your divorce. Let me explain that. Independent of a divorce process, you and your spouse could, at any time, appeal or apply to the bank and say, “We’re both on the mortgage, but we want Spouse A to assume the mortgage in his or her sole name,” or, “We’re both on the mortgage, but we want to refinance the mortgage and Spouse A is going to refinance it in his or her sole name.” You don’t have to be divorcing to do that. You go through their regular application process, of the bank, that is, and they’ll decide whether or not they approve your application.

If they know that you are going through a separation or a divorce process, in almost every case that I have seen, the bank is not going to want to process your application in the midst of that process while your financial obligations and your financial entitlements are still up in the air and still being figured out. They’re going to want to wait typically. You can ask your bank, ask your mortgage broker, but generally speaking, if they know you’re going through a divorce or separation, they will want to wait until you have the final official divorce document from the court, and that’s a different document in every state, and they’re going to want to review the terms of that document typically in concert with the more detailed terms of your contract.

That takes a while to get to them. In that case, you can’t really refinance or assume during your divorce process if the bank is aware that you are separating or divorcing. You will wait until you’ve negotiated all terms. You’ll wait until you’ve signed the contract, until you’ve filed all the papers with the court, and until you’ve received those papers back with the court with your divorce decree, whatever that’s called in your state: judgment of divorce, divorce decree, you name it. That’s typically what the bank wants to see and review in order to even process your application. Then they may process it and deny it, or process it and approve it.

Even to just apply, if you disclose to them that you’re in a separation/divorce process, likely the timeline will be you’ll go through that process, you’ll wait, you’ll get your judgment of divorce, your divorce decree, and then you will initiate the application for a refinance or an assumption.

Now, what’s the difference between those two things? The assumption is that you are continuing with the same loan, the same loan terms. Let’s say you got a 30-year mortgage and you’re nine years in. You’re still in that same timeline. You’re not starting over. You’re basically just removing one person’s name from the loan, and everything else stays the same: your payments, your interest rate, the amount of years you have until you’re fully paid off. Everything stays the same, whereas, with a refinance, you’re starting the clock over. You get a new interest rate typically. You start over from day one. You can change the terms of the loan. You could do a shorter one or a longer one. Everything is on the table in a refinance.

For an assumption, the banks generally don’t love doing that. They’re not very motivated to do it because it’s just a loss for them. They’re basically losing one potential person to go after in the event you default on your loan, and they’re not really gaining anything in exchange, whereas if you are refinancing, the timeline for the loan restarts. You restart at the beginning paying a majority of interest payments to the bank as opposed to principal. There are fees for the refinance that exceed the fees for the assumption generally. It’s more favorable to the bank, and they’re more open and more permissive in granting refinances than they are in granting assumptions.

For those same reasons, many couples, especially when you’ve gone through a period of pretty low-interest rates, will really prefer to have the spouse remaining in the home assume the mortgage and keep that good interest rate if it is a good interest rate. They’ll prefer that over doing a refinance at new higher interest rates and starting the clock over, starting that 30-year timeline over for their repayment of the mortgage.

You can never know in advance whether or not you’re going to be approved. The key is to get a sense from the bank, from the lender, or from your mortgage broker in advance of everything that you need to have in place in order to apply for the assumption or refinance, and get that all together almost before you apply or immediately upon applying because the turnaround time you’re given for these applications tends to be pretty accelerated. They’re not going to wait six months. You apply and then six months pass, and then you get your judgment of divorce or your divorce decree. No. If they need your divorce decree, you want to wait until that’s done and then submit that to them with all the other components of your application and await their decision, which usually is going to take one to two months. But again, they can clarify that for you at the time.

As we’ve spoken to in previous episodes, if they approve the assumption or the refinance, terrific. You’re all set. What happens if they don’t? Well, basically, if they don’t approve the refi or the assumption, your options are either for the spouse who is being bought out and is not remaining in the home to be willing to remain on the debt, have their name on the debt for some set period of time, not indefinitely. Maybe two years until your youngest finishes elementary school or whatever the timeline is that’s relevant for you, but to have them agree to remain on the debt for some period of time. Or if that doesn’t work for them, for instance, if they’re trying to buy their own place and they need to be able to get credit, then really the only solution to have their name removed from the mortgage is not to do a buyout, but to do a sale.

Of course, I should say, banks, I’m thinking of traditional commercial banks. They aren’t the only source of lending. You could certainly get a loan, if that’s available to you, from a family member or any type of personal loan. So if you could come up with another source of capital to pay off the loan and satisfy it, then that could be a way to get your spouse’s name off the mortgage, but it is less common that people have access to that amount of capital to just pay off a mortgage without selling the asset that it’s encumbering, without selling the apartment.

So, that was our episode on refinancing and assuming mortgages. I hope it was helpful for you.

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