What is a mortgage assumption?
An assumption is the term used by mortgage lenders to describe the process of taking over (or assuming) legal liability on a mortgage.
When do mortgage assumptions usually come into play?
- In a Divorce situation: If you were married and your spouse was included as a borrower on the original mortgage, you may need to complete an assumption following your divorce. Typically, one spouse gets awarded the property through the divorce and the other spouse needs to be removed from the mortgage. The spouse wanting to retain the home would “assume” the mortgage.
- In a Death situation: If a borrower passes away and someone else wants to assume the legal liability on the mortgage and retain the property, they would need to complete an assumption. Most commonly, in this situation, the people trying to complete an assumption are the parties who were awarded the property through the probate of the estate.
Who can apply for a mortgage assumption?
To apply for an assumption, you have to be able to show the lender that you have been given the legal rights to handle the property.
In a divorce situation, the documentation that proves this is the:
- Executed divorce decree
- The quit claim deed that accompanies the divorce decree
The mortgage lender will review a copy of the divorce decree. They also want to see a copy of a recorded Quit Claim Deed. A Quit Claim Deed is a document that removes one spouse from the Title of the home.
It is very common for a Quit Claim Deed to be issued and recorded in conjunction with your divorce decree, so if you’re currently working on a divocrce, make sure you talk to your divorce attorney about getting a Quit Claim Deed executed as part of the process.
In a death situation, if the borrower died with a will, you have to be the party who was awarded the rights in the will in order to apply for an assumption. Most commonly, the person who becomes the executor of the will is the person who applies for an assumption.
If the borrower died without a will, the estate will need to go through probate court in order to have a personal representative appointed. Once this representative is appointed, their job is to make decisions about how the home will be handled.
Most commonly, it is the personal representative who applies for the assumption.
If you are someone who was not included on the original loan as a borrower and you do not have any rights to handle the home following the probate of the estate, you likely will be unable to assume the loan (even if you were living in the property and/or contributing to the mortgage).
How do you apply for an assumption?
To apply for an assumption, you have to prove to the lender that you can afford the mortgage payments on your own.
When the original borrower(s) took out the loan, they had to prove that they could afford the mortgage, so lenders put assumption requests through the same review process.
You can be expected to submit the following documents to show that you can afford the mortgage:
- Income Verification: You will be asked to send in pay stubs, benefit award letters, profit / loss statements etc. to show the bank your income.
- Tax Returns: Usually, you’ll be required to send in tax returns for the most recent two years.
- Bank Statements: You can expect to have to submit your most recent 60-days worth of bank statements.
- Verification of your Expenses: You can expect to have to submit verification of your expenses either on an expense sheet that you fill out or by sending in utility bills.
- Credit Score / Credit Report: You can expect the lender to pull your credit report and review your credit score to see if you are paying on any other outstanding debts.
The lender is looking at your front-end and back-end debt to income ratios during this process.
The decision on whether you qualify for the assumption will be issued based on whether the mortgage lender believes you can comfortably afford payments without defaulting on the mortgage.
(Sometimes, in a divorce situation, if you have a divorce decree AND an executed Quit Claim Deed showing that your spouse has been removed from Title, lenders will allow you to avoid the financial review part of the assumption process. This depends on your individual lender’s practices. If you’re in a divorce situation, you may want to ask your lender about this option before submitting documents).
Do mortgage lenders have to give you an assumption if you ask for one?
No. Different investors have different guidelines around assumptions. Some investors include terms in the original mortgage documents saying that the loan is not assumable.
If your mortgage is not assumable, retaining the property and assuming the loan is not going to be an option.
If you’re a co-borrower on the mortgage and the other co-borrower died, you don’t have to apply for an assumption
In this very particular situation, if you are a co-borrower on the mortgage and the other co-borrower died, you just have to send in the death certificate of the deceased borrower in order to get their name removed from the loan.
Since you already have legal liability on the mortgage and it is clear the borrower passed away, the remaining liability on the mortgage automatically passes to you.
You should inform the lender about the borrower’s death via the death certificate and just keep making payments on the property.
Assumptions vs. Adjusting the Parties on Title
Being “on Title” for a property means that you have an interest in the decision making of the home but it does not mean that you have legal liability or responsibility on the underlying mortgage.
If you are “on Title,” you have to sign off on any sales or refinances of the property.
A Quit Claim Deed is the instrument that can add or remove people from Title.
You can add a party to Title relatively easily with a Quit Claim Deed but using a Quit Claim Deed does not change the legal obligation on the underlying mortgage.
Many people think that by being on Title, they have assumed the loan but only a formal assumption can change who is considered a borrower on the mortgage.
Mortgage Assumptions and Loan Modifications
It is very common for mortgages that need assumptions to also be behind on payments.
Mortgage lenders typically don’t offer an assumption option to borrowers in default
Depending on your investor and mortgage servicer’s guidelines, if the mortgage loan is in default, you cannot adjust the liability on the mortgage through an assumption without resolving the default issue.
In this case, your mortgage servicer will make you apply for a loan modification AND an assumption at the same time.
If this is happening to you, you should familiarize yourself with the loan modification document package and prepare to go through the assumption and the loan modification process simultaneously.
In a divorce situation, the banks may make you do the loan modification FIRST before you can complete the assumption
In a situation where both spouses are borrowers, the loan is in default, and the lender will not let one spouse assume the loan before modifying, understand this…
It is in the interest of BOTH spouses to resolve the default and avoid further foreclosure activity.
The legal liability on the mortgage attaches to BOTH borrowers. So, if the modification cannot go through due to one spouse’s failure to participate, the assumption will not be able to go through, and then the loan will be moved to foreclosure.
Then, BOTH spouses (regardless of their divorce status) will be facing foreclosure. An eventual foreclosure will impact the financial situation of BOTH parties, even if you were the spouse who lost rights to the home.
So, the best thing to do in this situation is to try and work collaboratively with your ex-spouse to get the loan current and back on track through the loan modification process.
Then, the spouse who was awarded the property can apply for the assumption after the loan is current and out of default.
Can I refinance to get my spouse off of the mortgage?
A refinance can be used to remove an ex-spouse from the mortgage in a divorce situation but the mortgage has to be current in order to qualify for a refinance.
A refinance refers to the type of restructuring for a mortgage that is NOT in default. Part of qualifying for a refinance is showing a current on-time payments history.
With a traditional refinance, a new lender buys your mortgage debt, removes your ex-spouse and then writes you a new loan with new terms.
A refinance is different from a loan modification.
A loan modification refers to the type of restructuring for a mortgage that IS in default.
So, if your loan is current and you’re going through a divorce, a refinance may be a viable option to adjust the legal liability.
But, if the loan is in default, you will likely have to complete a loan modification first because you won’t be able to show the qualifying payment history needed for a refinance.
Many people do a loan modification first. The loan modification brings their loan current and then 6 months or so after the modification is finished, they complete a refinance.
What if I can’t afford to retain the home and don’t want to assume the mortgage?
The general rule for determining whether a mortgage payment is affordable for your household is:
Your mortgage payment should be about 30% – 35% of the total monthly household income
A mortgage payment that takes up approximately 33% of monthly household income leaves room for other required monthly expenses to be taken care of and provides additional funds that can be saved for emergency expenses.
This rule is also used by mortgage servicers when they’re deciding whether you can afford a loan modification so if the monthly mortgage payment takes up much more than 33% of the monthly household income, you likely won’t qualify for a loan modification.
Just because you were awarded the property doesn’t necessarily mean you can afford it by yourself. If this is happening to you, it may be time to consider other options to avoid foreclosure:
- Selling your home for equity: If you have fallen behind on mortgage payments but you have equity in your home, you can sell your home before foreclosure and walk away with the equity. You do not need your bank’s permission to complete an equity sale of your home, even if you’re behind on payments.
- Short Sale: A short sale allows you to sell an underwater property for less than what is owed on the mortgage. Your mortgage lender approves the sale and then typically waives the deficiency balance (the remaining amount owed) so you can sell your home and move on without owing the remaining balance.
- Deed in Lieu of Foreclosure: A deed in lieu of foreclosure is an agreement between yourself and your mortgage lender where you sign a document giving the house back to the bank in exchange for the bank agreeing not to foreclose on you.
- Buy time using Foreclosure Mediation and then sell shortly before your foreclosure auction: If you qualify for mediation under the WA State Foreclosure Fairness Act, you may be able to receive more time in the home or extend the foreclosure timeline so you can move on your terms.
Mortgage Relief Options For Washington Homeowners
Mortgage issues are complex. Banks and mortgage servicers can be very uncooperative. If you think you might need some help, you have some good options. Here are three articles to help you understand the help that is available to you.
What Can a Mortgage Attorney Do For You
What to Look For In a Loan Modification Attorney
What Can a Foreclosure Attorney Do For You
If you’re a Washington state homeowner who has questions about the assumption process, feel free to give me a call at (425) 654-1674.