Divorce & USDA Loans: Key Mortgage Questions Answered
Diamonds may last forever, but that’s not always the case with marriages, including unions involving homeownership and USDA loans. Since homes are commonly the largest marital asset among couples, what happens when couples divorce is a crucial question for USDA loan borrowers.
It turns out that USDA loan rules generally make things easier for divorcing parties because you can assume a USDA mortgage, unlike many other mortgage types. This process enables borrowers to retain their existing interest rates, loan balances, and property ownership without requiring new financing.
Research indicates that fewer people are getting married. As of 2021, 25% of 40-year-olds in the United States had never been married, according to data from the Pew Research Center and the U.S. Census Bureau. The statistic jumped from 20% in 2010.
Fewer marriages mean fewer divorces, and key reasons for this trend may include prioritizing cohabitation and individuality, a desire to avoid divorce and legal complications, a preference for not having children, shifting cultural norms and values, and changing gender roles and expectations.
The overall divorce and annulment rates in the 2020s were 2.3-2.5% per 1,000 total population, according to the Centers for Disease Control and Prevention (CDC). In contrast, divorce rates in the 1980s and 1990s were higher than 4%.
For USDA loan borrowers, one problem that can arise is that divorces are most likely to occur long after mortgages first originated and at a time when couples have significant real estate equity. As a result, resolving mortgage issues can become a central financial issue when couples part.
The United States Department of Agriculture (USDA) established USDA mortgages to help rural residents finance their primary residences.
There are two basic types: USDA Direct and USDA Guaranteed loans. USDA Direct mortgages are funded by the federal government and designed to help those with low or very low incomes. USDA Guaranteed loans are funded by private lenders but backed by the USDA.
Income limits are much more accessible for USDA Guaranteed Loans. Both loan options offer a zero-down payment option, and because of strong federal backing, they tend to have lower interest rates.
The happy couples who co-sign for their first mortgage and later divorce must determine how to treat the mortgage. Will it be best in a divorce situation to pay off the debt, refinance, or keep the loan? Which option is practical and affordable for both parties?
Selling a home during a divorce can wield enormous emotional challenges because it might be where a family lived, raised children, and created memories.
These questions have no easy or instant answers, but in a divorce involving a USDA mortgage, the process may be easier than many other loan options because USDA mortgages offer some flexibility
A divorce decree is a formal document that ends a marriage and resolves many shared matters between a couple. However, divorcees must remember that a liability remains until the mortgage is paid off, refinanced, or assumed. Let’s walk through these options:
A loan payoff will eliminate the liability problem; however, this is often an impractical financial option. You need cash, new financing, or both to repay the mortgage. A divorcing couple may not have the funds or credit to pay off the debt.
Refinancing with a new loan, paying off one spouse, and keeping the home can be an attractive option; however, in practice, an individual spouse may not have sufficient income or credit to make this approach viable. Affordability can be an issue because the existing mortgage will need to be repaid, and additional funds may be required to compensate the spouse who is giving up title to the property.
This option can make good financial sense, but it also means leaving the home, which can be disruptive for children and difficult for owners.
In the case of loan assumption, one party takes over the loan with its current rate, terms, and repayment schedule, while the other is removed from the mortgage. The result is that the remaining spouse keeps the financing with the original rate and terms, with no need for a new down payment.
With a qualified assumption, the remaining USDA borrower becomes responsible for repaying the debt while the exiting spouse obtains a release of liability from the lender. In effect, the exiting spouse is taken off the mortgage.
A USDA assumption is not automatic. The assuming borrower must meet certain qualification standards. For instance, the property must continue to be the primary residence of the borrower, the borrower cannot exceed income limits, and the borrower must have the necessary income and credit to continue the loan.
An alternative idea is to keep the mortgage by sharing the home. Sharing may seem like a terrible idea at first, but this option may be practical for homes with one or more accessory dwelling units (ADUs).
ADUs have become increasingly common. They are separate housing units on a single lot. Often called casitas, granny flats, garage apartments, in-law suites, or English basements, ADUs can allow divorced couples to share a property, be near the children, and keep their current mortgage. A 2024 Federal Reserve Bank of San Francisco study estimates there are at least 1.6 million ADUs in the U.S.
In a situation where the mortgage will be continued, both individuals should understand that each is fully responsible if one or both make missed payments.
Qualified assumptions are generally also allowed with VA loans (financing with zero down for qualified military Veterans) and FHA mortgages (financing that requires a down payment of at least 3.5%). In each case, the borrower must meet the lender’s qualification standards to assume the loan.
Qualified assumptions are generally not permitted with conforming loans, which are mortgages that meet the standards of Fannie Mae and Freddie Mac. Instead, these loans have a due-on-sale clause that requires repayment in full when title to a property changes.
However, the Garn-St. Germain Depository Institutions Act of 1982 federal law, prohibits lenders from exercising the due-on-sale clause in divorce situations.
Attorney Nicole K. Levy with the firm Lynch and Owens in Hingham, Massachusetts, says, “Federal law prohibits lenders from exercising the due-on-sale clause for certain transfers, including transfers to a spouse or child resulting from a divorce decree, legal separation agreement, or incidental property settlement agreement.”
Levy says, “Even if your conventional mortgage has a due-on-sale clause, your lender generally cannot block an assumption by your spouse following a divorce if that spouse independently qualifies for the loan.”
While a qualified assumption is possible for USDA loan borrowers, divorce is a complex, life-changing event that involves significant financial, family, and personal decisions. For this reason, you must protect your interests. Speak with a USDA-approved lender and family law attorney to fully understand your options.
Yes, you may be able to keep your USDA loan after a divorce through a loan assumption, which allows one spouse to take over the loan without refinancing. The assuming spouse must still meet USDA eligibility requirements, including income limits and credit standards, and the home must remain their primary residence.
To remove an ex-spouse from a USDA loan, you typically need to apply for a qualified loan assumption or refinance the mortgage into your name only. With an approved assumption, the remaining borrower takes over the loan terms, and the departing spouse is released from financial responsibility.
During a divorce, a USDA mortgage can be resolved in several ways: selling the home and splitting the proceeds, refinancing the loan, or one spouse assuming the mortgage. The best option depends on financial eligibility, equity, and whether either party wants to keep the home.
