Garn-St. Germain Act & Joint Mortgages in Divorce

Do you have a client who would like to retain the marital home but is unable—or unwilling—to refinance? There is a lesser-known federal law, the Garn-St. Germain Depository Institutions Act of 1982, that may offer a practical solution in certain divorce scenarios where the mortgage remains in both parties’ names.

In today’s interest rate environment, many homeowners are reluctant to refinance an existing loan with favorable terms. This federal provision can provide an alternative path.

Below are several key considerations regarding how the Garn-St. Germain Act may apply:

Divorce Context: 

When one party is awarded the property through a divorce, the Act permits that individual to continue making payments on the existing mortgage without triggering the lender’s due-on-sale clause. In effect, the loan is not treated as a new obligation, allowing the homeowner to avoid requalification requirements such as credit approval, appraisal, and current market interest rates.

Not a Traditional Assumption: 

This differs from a formal loan assumption, where the remaining party must qualify with the lender and take sole responsibility for the loan. Under Garn-St. Germain protections, the mortgage can remain in the original borrower(s)’ names while the occupying party continues making payments.

Probate Applications: 

The same protections may apply when a property transfers to a beneficiary or heir upon the owner’s passing. The recipient may continue payments on the existing loan without it being considered a new financing event.

Credit Considerations: 

A key factor to evaluate is the ongoing liability of the party no longer occupying the property. Even if ownership is transferred, their name may remain tied to the mortgage. Any missed or late payments by the occupying party could negatively impact their credit, making this an important risk to address in advance.

In summary, the Garn-St. Germain Act can offer a pathway for a client to remain in the home while preserving favorable loan terms, potentially reducing both financial and logistical burdens during a divorce. However, it requires a level of trust and planning, particularly with respect to the continued financial exposure of the non-occupying party.

Please feel free to reach out if you would like to discuss this further or if I can provide additional insight for your real property matters.