Mortgages and Divorce
No doubt, love rocks… but sadly it doesn’t always last forever. Stuff can get weird, hearts can change – marriages end. However, mortgages taken out jointly, when your union of love was stronger than an 80’s power ballad, live on to be each other’s responsibility, at least until the person keeping the home can manage to divorce the loan itself.
It is important to conceptualize that a divorce decree doesn’t supersede your mortgage contract. Therefore, it is not generally as easy as contacting the mortgage company who services your loan and asking them to “remove” your ex’s name.
Traditionally, you would need to refinance the loan which means having to qualify for the loan as you originally did by having:
- Sufficient credit worthiness
- Income in conjunction with other debt and
- Having a favorable equity situation.
It is key to speak to local lenders or mortgage bankers about the possibility of qualifying for a replacement mortgage before waging battle for the house.
Typically, divorce decrees provide the party getting the home with a short time period in which they would need to refinance and the person is at risk of contempt of court if they are unable to comply. Even if you can qualify for a new mortgage, you would want to quantify the cost of doing so (typical closing costs are 3% to 6% of the loan amount) into whether or not it is best to keep the home and further equate the changes with the mortgage (if it is an older mortgage, then chances are the rate could improve however, if the loan was refinanced already in the last 2 years, there is a chance you could refinance into a higher rate). If the house has equity and you’d have to pay your ex off a portion of that equity and don’t have other assets to draw from, refinancing is unavoidable regardless of what it costs and what the terms would be.
Release of Liability
Though the expectation should be that you would need to refinance the loan in order to get the ex’s name of the mortgage, it might after all be as easy as just asking. Though this practice is somewhat rare, some loans can be considered for a simple process called Release of Liability subject to investor permission. In this, the servicer would look at the individual’s situation regarding credit, income, equity and confirm that there are not secondary liens against the property that would require subordination – and if the homeowner would otherwise qualify for a refinance, the investor may agree to just remove the former spouses name saving them the hassle. Though it is worth asking for due to simplicity and cost effectiveness, a lender agreeing to release liability is rare since usually it benefits investors to leave both people on the mortgage for as long as they can as in the event the person keeping the home runs into a circumstance where they can’t continue paying, the other would need to consider making the payments in their place in order to preserve credit.
Another easier and more cost effective alternative to refinancing though again, statistically inferior in occurrence, would be loan assumption. Some mortgages, most common recently FHA loans, are “assumable” meaning that the terms and payment schedule may be passed to another homeowner if they independently qualifies. Divorce or no divorce, it is wise to look back at the initial paperwork to see if your loan is assumable as if market rates increase with time, the ability to pass advantageous financing to a future owner could directly influence the sales price in a positive light.
Modification serves as sort of a wild card option on our menu. A mortgage modification is a lender strategy to help delinquent homeowners catch up and also in some cases potentially restructure slightly unaffordable mortgages. Since divorce is and for 30+ years has been the perennial number one precursor to mortgage delinquency and foreclosure, it’s worth discussing here. The problem however with modifications in this context is that they are terribly unpredictable. Just like they may or may not be approved and may or may not improve the terms of the mortgage, they may remove an ex-spouses name or it may rather emerge post modification unchanged.
By definition, modifications are provided by a lender in response to a homeowner’s declaration (by way of not paying as agreed) that the loan is at risk of foreclosure, therefore the homeowner is more or less at the mercy of the lender and smaller details are not often negotiable. The reality is that sometimes a servicer on behalf of a certain investor pool will elect to correct the names on the mortgage if a modification is approved however, many times the names on the loan go unchanged with newer contributors not getting added and long gone
Much easier than removing a name off the mortgage, is removing the name off title via quitclaim. A quitclaim is just a simple notarized agreement filed locally in which one owner agrees to opt out of their ownership claim, now allowing the remaining owners access to financing or sales options without them. Quitclaiming your ex-off title may be supervised as part of the divorce process or could be up to you to work out on your own once it is over. It is key to foresee if this would be an issue due to communicative problems or conditional acceptance as it will be impossible to sell or restructure financing without it. For instance, if you ex will not quitclaim off until you pay the amount you agreed to pay to offset your keeping the house (equity buyout) and you don’t have the money so it’s a standstill, it’s better to understand before investing personal funds and considerable time on something difficult to get off the ground.
If you are not keeping the home, there are some steps you can take to protect yourself even if the reality is you will be sharing the mortgage for a while still.
- Pull a copy of credit at the point where the divorce is finalized and keep it safe with a copy of the divorce decree.
- If you are not renting through a property management company, make sure you pay rent through a documentable method (canceled checks that populate on bank statements) and pay every single month on time and in full.
- Close other joint accounts and manage debt with extreme care and diligence.
I have had a few clients throughout the years who took these proactive steps and were able to qualify for new mortgages EVEN THOUGH their ex let a mortgage they were party to go through foreclosure. They were able to clearly isolate the issues with non-payment as taking place after they were no longer legally responsible and worked with a local lender on an in-house mortgage. We can help you with this.
Author Tim Fischer is a Foreclosure Prevention Counselor at LSS Financial Counseling. Have a question about Divorce and Mortgages? Leave a comment!