Marc Edelstein from Ross Mortgage is back with us. We are discussing mortgages for those considering divorce and navigating the high-interest rate environment. As a CDLP Certified Divorce Lending Professional, Marc sheds light on the complexities of mortgage financing during divorce proceedings, addressing the common question of how to assume an existing mortgage with a low-interest rate while removing the former spouse from financial liability.
Marc distinguishes between two types of assumptions in the context of mortgage financing: simplified assumptions and qualified assumptions. In a simplified assumption, one spouse takes responsibility for making the payments without removing the other spouse from the mortgage. The financial obligation of the original borrower remains. In a qualified assumption, the person awarded the home assumes the terms and releases the other spouse from financial liability. Marc also highlights the types of assumable loans, such as government-insured loans like FHA, VA, and rural development loans, as well as most adjustable-rate mortgages.
Paula raises a scenario where a couple is divorcing in a high-interest rate environment, and one spouse wishes to stay in the home but also wants to remove the other spouse's name from the mortgage. Marc explains how this can be done, or you can wait until interest rates become more favorable or certain life events occur, like children graduating from school. This arrangement doesn't affect the departing spouse's ability to find new housing.
The conversation touches on the importance of considering the equity buyout in a divorce settlement. If one spouse has to buy out the other's equity portion, they need to be careful about the assets they use for this purpose. Cash and traditional IRAs are not equivalent. Marc emphasizes the need for clear communication and agreements in these matters.
The discussion also delves into managing mortgage communication when one spouse is not on the mortgage. The law grants the person awarded the home "successor's interest," giving them the same rights as the spouse on the mortgage, including access to mortgage information, grace periods, and protection against due-on-sale clauses.
It's always important to consult professionals, such as financial advisors, CDFA professionals, and CPAs, to make informed decisions during divorce proceedings. Marc's contact information is shared for those seeking mortgage-related advice.
Find mark at thatmortgagebanker.com or at (248) 379-6749.
Reach Paula at paula@paulachristine.com or through her website, paulachristine.com.
Paula Christine: Hi, welcome to Beyond the Paycheck. I'm Paula Christine. We're going to talk with Marc Edelstein from Ross Mortgage who's been with us-- I don't know what, about three or four times, Marc.
Marc Edelstein: I think it's the third time.
Paula: He actually brought this conversation to me. I think it's great for those who are considering getting a divorce and interest rates are so high, do you stay in the home because of that? Do you decide to sell? Marc's going to help us out with that decision.
Marc: As a CDLP Certified Divorce Lending Professional, I talk to a lot of people all the time about mortgage financing as it relates to divorce, and one of the most common questions I get these days is how can I assume my existing mortgage that has a very low-interest rate and still get my former spouse off of that mortgage and release from liability. Before we go forward, let's define what an assumption is. An assumption is somebody new is going to assume the original terms of that financing.
In our case, we're talking about a house and a mortgage, but it could be for anything. If there's some financing attached to a car that's assumable potentially. That's just a broad definition of an assumption. In mortgage, there's two types of assumptions. There's a simplified assumption and a qualified assumption. In a simplified assumption. That just means that one spouse, one person in this divorce, is going to take responsibility for making those monthly payments and the other obligations that go along with that particular residence.
Paula: That means that they're going to refinance it or--
Marc: No, they're just going to assume the payments, the responsibility for making the payments as they are.
Paula: They're not necessarily taking the other spouse off the mortgage.
Marc: Not at all. In an example, let's say that a husband and wife are getting divorced. The husband is the one who is on the mortgage, but the wife was awarded the home. Along with being awarded the home, she has to accept responsibility for those payments but that doesn't take away the financial obligation that the husband made when he originally took out the mortgage.
Paula: Even though she has the simple assumption, if that's the right word, his name will still be on there. He's divorce-wise, not obligated, but mortgage-wise by the mortgage company, he still would be.
Marc: In the eyes of the creditor he's definitely still obligated.
Paula: What's the other assumption?
Marc: The other assumption is a qualified assumption and a qualified assumption is when the person awarded the home assumes those terms and does release that other spouse from financial liability. There's three types of mortgages, four types of mortgages that are assumable. Any government-insured loan is assumable, an FHA loan, a VA loan, a rural development loan, or USDA loan. Most adjustable-rate mortgages are assumeable.
Paula: Let's say we're married and we're getting a divorce and we're in a high-interest rate environment and we have to make a decision because I have clients that are currently going through this right now. She wants to stay in the home, but ultimately she'll have to take his name off of it. If she does that and has to refinance any portion of that, she's going to be at what, 7.5, 8%?
Marc: Yes. Pretty close to that. In that range for sure.
Paula: They could make the decision that he stays on the mortgage-
Marc: Correct.
Paula: -until maybe interest rates go down.
Marc: Interest rates go down some other event like kids graduating from high school and not needing the school district anymore, and then that's the time that they agree to sell.
Paula: What does that play on his ability to find new housing?
Marc: It doesn't. In our world, that's called a contingent liability. Yes, it's a liability that's on the credit report, but since there's a court order relieving that person from responsibility from the payment when in mortgage lending don't factor that payment into the borrower's qualifying. Now if the person who is responsible for the payments does not make the payments and derogatory payment history it's reported to the credit, it's on his credit as well.
Jon: That would be a really spiteful ex-husband or ex-wife to do that, I'd imagine.
Paula: That situation I'm sure would have to be a very amicable divorce.
Marc: Sure.
Jon: I would guess one other piece of advice you'd offer here, Marc, is don't stay together just because your mortgage rate is low.
Marc: That's true. Definitely, doctor, you should never really stay together because it's financially convenient anyhow, I don't think.
Jon: Because we've all seen that.
Paula: Oh yes.
Jon: Even get divorced, but stay in the same house and what's the sitcom where they draw a line right down the middle and say, "This is your side. This is my side."
Paula: Wasn't that the movie Kramer vs. Kramer or something?
Marc: Was that like War of the Roses?
Paula: That was the name of the movie, War of the Roses. Anyway.
Marc: None of this really matters. This assumption talk. If there's an equity buyout where one spouse has to purchase out or has to buy out the other spouse's equity portion, unless that's going to be equalized some other way with some other asset, you can't do an assumption and take money out. The assumption's not even an option.
Paula: Again, let's go back to us getting a divorce. You want to keep the home and let's say the buyout is 150,000. I could take 150,000 of another asset and then just sign off on the home. Then you don't have to refight.
Marc: Yes, but you got to be careful what that asset is. Like--
Paula: Cash.
Marc: What happens if I say, I'll give you my $150,000 traditional IRA?
Paula: Pass.
Marc: You're like, "No, no, no, no, that's not equal because I'm going to pay taxes on that." When I have to draw on it, that's really not equal, even though the value of those two are equal at that time.
Paula: Now, I had that conversation with clients this last week that they're not the same cash and a traditional IRA are not the same option or same value.
Marc: No. No, no, no. Back to the simple assumption. Let's say we're getting divorced, I have the mortgage, you're awarded the home, you have to make payments, but you're not on the mortgage, you're not receiving any information from the loan servicer. How do you start that type of communication with the loan servicer? In our case, where that person who is awarded the home is not on the mortgage, they have what's called the successor's interest now because they were awarded the home and they have all of the same rights as the spouse borrower as far as the servicer has to send them the monthly statements, has to allow them to create a profile on their website to manage the mortgage.
They're given the same grace period of those 15 days after the first of the month for the payment to be due. They have access to the escrow account. They have all of the same rights as the actual obligator on a mortgage, but they're not on that mortgage. It also prevents the servicer from executing the due on sales clause because there is a transfer that takes place when the house is awarded to that spouse. If that spouse isn't on the mortgage, the mortgage company can say, "Hey, there was a transfer. We are going to call that loan due." That law prevents them from being able to do that.
Paula: Marc, talk to me like I'm a Fifth Grader because I didn't get that. There's a law, I don't need to know what the name of the law is, but there's a law that says that I'm not the original person on the mortgage. Correct? You are.
Marc: Correct.
Paula: I can take over that mortgage and still have all the rights that you do.
Marc: Correct.
Paula: Is there anything else that I missed?
Marc: No.
Paula: Oh, then I guess I got it.
Marc: No, you got it right.
Paula: How does that affect you?
Marc: It doesn't. It just allows you who was awarded the home to be able to manage and pay and access all of that mortgage information.
Paula: Then the mortgage doesn't ever go in my name.
Marc: It doesn't go in your name at that point. No, it does not. In an ideal situation, both spouses would like to get what they want. The one spouse wants to come off of that mortgage. The other spouse wants to go on that mortgage, but they want to keep the interest rate that they have. They try and do that qualified assumption where they apply to assume the original terms of that mortgage or release the other spouse from liability. We talked about the different types of loans that are assumable, but conventional loans are not assumable, at least not under the original terms of the mortgage.
Paula: Really?
Marc: Correct. They're not assumable.
Paula: What do the majority of people have?
Marc: Conventional financing. That doesn't mean that a conventional loan can't go through a qualified assumption. However, the servicer can make up their own rules. There's no federal laws on how that would work. Each servicer might have their own rules. They might want to see a year or two years' worth of payments being made before they would ever consider it. They might want you to make a principal reduction payment of 10% or 5% more on the mortgage balance to even consider it.
Then they might even come back after all of that and say, "Yes, we'll allow you to do an assumption, but the interest rate is going to be much closer to what market interest rates are now." Not necessarily that rate that you have locked in, and it's not because they're being deceptive, it's just business. Why would they do that for you to protect your 3.5% interest rate when they should be really getting closer to a market interest rate for that? It's just business.
Jon: My follow-up question for you there, Marc, is in terms of a conventional loan where some of those other protections aren't in place as you just mentioned, as someone who's about to get a divorce. Hypothetically, if one of our listeners is about to get a divorce, are there any things they can do to prevent getting essentially whacked like that?
Paula: I'm going to go with the look on his face. No.
Marc: Other than--
Jon: The look on his face says, no. There's our answer. [laughs]
Marc: Well, no, other than coming to some agreement where the other spouse stays on the mortgage, stays on title, and that person makes the payment until such a point in time in the future where it's financially beneficial.
Paula: Yes. Because if you think about it if you know that I'm buying a house and my payment at the current interest rates, even a 5%, which would be what, 2.5% or 3% lower than the current interest rates. It's a huge, huge savings in what my mortgage payment would be.
Marc: Correct.
Paula: You take a spouse who's considering getting a divorce, which means they'll lose half their income, potentially they might have alimony or child support, but even taking that out of the equation, if you're at a mortgage payment of a thousand or something and now it's going to go up to 1,300 or 1,400, that could totally change your decision to keep the home.
Marc: Oh, absolutely. When I consult with divorcing homeowners, really what we find is that it's all really more about cash flow each month than it is about preserving the rate. They think it's about preserving that interest rate because they've conditioned to think, well, 3.5% is better than 7%. However, it really all comes down to cash flow. Let's say you were awarded the home and you took on some marital debt that you are now responsible for. Well, looking at doing a cash-out refi and consolidating all that stuff, even though it might be a higher interest rate, you might still be improving your monthly cash flow.
If that's the case, that's usually far more attractive to people than giving up that interest rate once they see the numbers on how this impacts their cash flow.
Paula: My recommendation would be to meet with a financial advisor or CDFA before you make these decisions to determine what's best for you.
Marc: Yes, and your CPA.
Jon: Marc and Paula as you're discussing all these things today, my big takeaway is just like anything related to personal finance and divorce as we've said many episodes before, is such a stressful period of time. The financial aspect of it sometimes gets overlooked and there are so many intricacies, permutations, pick whatever seven-letter word you want out of this whole situation, especially when it comes to mortgages and homes you have to take the time to stop down, and talk to professionals about it and make sure you get it right because these mistakes can be so, so costly.
Marc: For sure.
Paula: Thank you, Jon. Marc, how does somebody get ahold of you?
Marc: I'm here in metropolitan Detroit. I have a telephone number at (248) 379-6749 or my website, which is thatmortgagebanker.com.
Paula: Thank you, Marc. If anybody would like to get ahold of me, they can reach me at paula@paulachristine.com or they can check out my website at paulachristine.com. Thanks again, Marc.
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