When you’re going through a divorce and need to qualify for a mortgage, one crucial element often gets overlooked: legal assignments of debt.
How debts are assigned in the divorce decree can make the difference between securing a mortgage and facing rejection.
In this post, we’ll break down the importance of legal assignments of debt, common mistakes to avoid, and strategies to ensure a smoother path to mortgage approval after divorce.
What Are Legal Assignments of Debt, and Why Do They Matter?
A legal assignment of debt is a formal agreement that transfers responsibility for a joint debt from one spouse to another, typically outlined in the divorce decree.
Example: If one spouse agrees to take full responsibility for a joint mortgage on the marital home, this arrangement is recorded in the divorce decree.
Why It Matters:
Mortgage lenders are very particular about debt obligations. The spouse assigned the debt is legally responsible for repayment, regardless of whose name is on the original loan.
Properly structured assignments can help the other spouse qualify for a new mortgage by excluding the assigned debt from their future loan applications, which improves their Debt-to-Income (DTI) ratio—a key factor in mortgage approval.
Common Pitfalls: Where Divorcing Couples Go Wrong
A common misconception is that the divorce decree automatically updates creditors about who is responsible for what debt.
In reality, lenders continue to report joint debts to credit bureaus unless the creditors are explicitly notified that one party has been removed as a joint obligor.
Pitfall Example:
- Imagine a couple with a $500,000 joint mortgage.
- The divorce decree assigns the mortgage to the husband, who keeps the house and agrees to make the payments.
- The wife, as the departing spouse, should be able to buy a new home because the mortgage debt is assigned to the husband.
The Problem:
Credit bureaus don’t care who the debt was assigned to in the divorce. If a payment is late, both spouses’ credit scores will be negatively affected.
Solution: The spouse retaining the debt should inquire about a Loan Assumption process with their lender.
This process allows the departing spouse to be removed from the joint debt while keeping the same loan terms.
Note: The retaining spouse must qualify on their own merits, and most lenders will only process this after the divorce is finalized and recorded.
Until this process is complete, the joint mortgage will continue to impact both spouses’ credit profiles.
Strategic Debt Assignments: Best Practices for Mortgage Approval
To improve the chances of mortgage approval, approach debt assignments strategically:
- Account for All Joint Debts: Ensure all joint debts are explicitly assigned in the settlement agreement unless both parties plan to continue paying and maintaining the debt jointly.
- Prioritize Secured vs. Unsecured Debt: Secured debts (like mortgages) typically have a greater impact on DTI than unsecured debts (like credit cards).
- Document Everything: Divorce decrees often lack the detail lenders require. Ensure the decree clearly specifies who is responsible for each debt and that all documentation is updated with lenders and creditors.
The Roadmap to Success
To achieve a favorable outcome, follow these steps:
- Step 1: Early Financial Counseling
Before divorce proceedings begin, work with financial advisors who understand both divorce and mortgage lending. This will help structure a settlement that supports future mortgage approval. - Step 2: Detailed Divorce Decree
Collaborate with your attorney to create a clear divorce decree that assigns responsibility for each debt. Where possible, include language requiring the responsible party to refinance joint debts, removing the other spouse’s name. - Step 3: Communicate with Creditors
After the divorce, notify each creditor of the debt assignment. Provide copies of the decree and any necessary documentation to ensure accurate records. - Step 4: Proactive Mortgage Planning
Before applying for a new mortgage, consult with a divorce mortgage specialist to review your credit report, DTI ratio, and other key metrics. Address any discrepancies early to avoid delays or denials.
Conclusion: The Power of Strategic Debt Assignment
Legal assignments of debt are crucial for securing a mortgage post-divorce.
By carefully managing debt assignments and ensuring all documentation is in order, you can significantly increase your chances of securing favorable mortgage terms.
This isn’t just about getting approved—it’s about setting both spouses up for financial success and homeownership in the future.
Sincerely,
Ross Garcia | Founder
Divorce Mortgage Advisors