Mortgage and Divorce
Finances are a touchy subject when it comes to divorce, but I guess every subject can get touchy during a divorce. I want to make sure you are aware of the implications of a mortgage when it comes to a divorce and the suggestions I have to protect yourself, on either side.
Who Gets the House(s)?
The first thing you need to do is work out who will keep the house(s). Sometimes separating couples decide that they will sell the residence and sometimes one party agrees to move, giving up rights to the home to the other. A good site with information to consider on who is best suited to take the house can be found on Professional Mortgage Matters blog. Such considerations include who is able to handle the mortgage payment on their own and is the size of the house needed considering the separation.
Once you determine who gets the house, make sure you understand the implications that may have down the road.
Predict the Future
When you decide how to work out the arrangements of the transfer of ownership and/or liability, make sure to consider what may occur in the future. Typically, a Divorce Decree or Separation Agreement will identify who takes ownership rights of the property and therefore all liabilities are the responsibility of the owner of the home after the divorce is complete. Seems simple enough, right?
The Separation Agreement or Divorce Decree is merely a civil agreement between the separating spouses. This agreement does not mean that the other spouse is following through on that agreement and does not override the agreement you made when you purchased the home. When you purchase a home and obtain a mortgage, both parties agreed to pay back on that mortgage and if it was not paid back as agreed upon, could impact you in several ways:
- Late Payments - any payments made outside of 30 days will be reported as your credit report as a late payment
- Short Sale - if the spouse who took ownership of the home agrees to sell the home at a price below the mortgage balance at the time, the mortgage company may be willing to accept a lower payoff, but would be shown as a short sale on the credit, which is very similar to a foreclosure
- Foreclosure - payments are not being made and the bank takes the home as the collateral for the mortgage debt
- Qualifying for New Debt - when qualifying for new debt, such as a home or car, income and debt information is gathered to identify you ability to repay the debt which may not be possible with the mortgage liability on your credit
ALL of these scenarios would impact both people despite what the Divorce Decree or Separation Agreement states. Typically the spouse that was awarded the house and mortgage will be responsible for all fees and costs associated with the problems that arise from that house and mortgage but that does not mean the person who was released, is released from the original agreement with the mortgage company.
Consider what incidents may occur in the future and work to resolve them prior to signing a separation agreement.
Possible Solutions
There are many solutions that can be considered to work through this issue during a divorce. Here are a few I thought of:
- Require that the spouse awarded with the home refinance the property immediately to remove your name from the liability
- If the refinance can not occur immediately, put a time frame by which the spouse must refinance the property to remove you from liability (maybe 1-5 years)
- Put in writing that the spouse who took over the mortgage will cooperate to provide documentation to show that they are paying the mortgage debt through their own funds
- This will, in some cases, allow the underwriters on a new debt to remove the mortgage debt from your financial picture to help you in qualifying
The Disclaimer
I am not an attorney and have based this post on my own divorce as well as experience in the mortgage business. I am not qualified to provide legal advice and you should consult with an attorney on your own for additional consideration when dealing with mortgage and divorce. Also seek mortgage advice from a qualified mortgage lender. Many attorneys are unaware of the implications of mortgage debt after a divorce. By talking with a mortgage professional you can better understand what would need to be done in the future to avoid problems with qualifying in the future.
Lending a Hand,
Scott Wynn
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