Divorce, and what that means for your mortgage
I have also helped people after the fact, and because they do not know the best way to protect themselves, their credit has suffered.
As a consequence, it made it difficult for them to later refinance or purchase their next home because their mortgage was not properly handled. As a result their credit was negatively impacted, and they were unable to qualify for another home even years after they thought the divorce was behind them. My hope today in providing you this guide is to ensure that your mortgage options and rights to homeownership are protected now and in the future.
Whether you are the party keeping the home or leaving the home, you must protect your rights and consult with a mortgage professional that can explain everything to you in detail. This guide is just a short summary of SOME of things to know, and should not replace a consultation with a knowledgeable and experienced mortgage adviser and seek additional professional legal counsel.
Your situation is unique. Please call me at 503-475-3788 to review your rights and liabilities as it pertains to your mortgage. I will clearly explain your options and help guide you through the process. For now, please read through this guide to gain a better understanding of how creditors view your obligation, as well as how they impact your future homeownership opportunities.
When you bought the house, you signed two legal documents; a Promissory Note and a Deed of Trust. Think of the Promissory Note as a very big I.O.U. The lender doesn't care if you get a divorce, you promised to pay the loan back, plain and simple. Just because one party is awarded the home or assigned the debt - that does NOT remove the other party from the obligation. Although you and your spouse may decide between yourselves that only one of you will be responsible for the mortgage, that agreement doesn't affect the lender and they didn't agree to it.
If they miss a payment it will affect your credit and the lender could come after you for repayment.
IMPORTANT TO NOTE:
Until your ex-spouse sells or refinances the home, the creditor can come after you for repayment if they get behind. It will also continue to report on your credit. The only way to get rid of the obligation is to sell or refinance.
If you apply for another loan to buy an automobile or another home, your old mortgage payment will continue to report monthly on your credit report. That loan payment may be calculated into your new qualifying calculations, making it difficult to get approved for financing for many years or decades to come. So what are your options?
The only way to get rid of the obligation is to sell or refinance. To help you understand what your options are, read the following ways to handle your mortgage obligations and rights to homeownership.
One of the easiest ways to remove your liability from the mortgage when getting divorced is by selling the marital home. If you can do that, it's a great way to cut ties and move forward.
Generally, it's a good idea to sell the house before your divorce is finalized to prevent future opportunities to fight over the sales price and equity. Plus, neither of you will have to worry about the other not making mortgage payments, maintaining the house, or paying taxes and insurance.
When the home is sold, the mortgage is paid off and generally the proceeds are split between the spouses to pay off debt, or use as a down payment on a new home.
Sometimes selling is not an option because of very valid reasons. Being upside down in the mortgage is one, or not wanting to move the children and maintaining a sense of normalcy during this time is understandable. Sometimes one party wants the other to have the equity rather than pay them money out of pocket. In these situations, one party keeps the house, and below are some very important considerations if this route is chosen.
If You Are The One Staying
Make sure to get an appraisal done now to determine the value at the time of divorce as your basis of splitting the equity. Otherwise, you could be required to split whatever profits are gained in the years of appreciation following the divorce. You will want to calculate the current "net" equity less sales commissions, excise tax, and seller closing costs.
It's critical that your ex quit claims off the deed. A "Quit Claim Deed" gets recorded at the county courthouse and will remove their name from the title to the home. This is important because if your ex has any future judgments filed against them, a lien can be attached to your house! The reason why is because the house is still technically an asset for them that another party can pursue to satisfy a debt that your ex owes. Quit Claiming will also prevent them from interfering with your future plans pertaining to the home because you cannot sell or refinance it without their cooperation.
If You Are The One Leaving
I highly recommend having a clause added to the decree that requires the home must be sold (or refinanced) within a specified period of time. Otherwise it could be years before you are no longer obligated to the existing mortgage, and the lender could come after you for repayment if your ex stops paying. You need to think through how this is going to affect your credit. Even though you won’t be living in the house any more, the lender still has your name on the loan, and if your spouse doesn’t pay, the lender could come looking for you. When that happens, the lender won’t care much that you’re not living in the house or that your ex promised to make the payments; the lender wants it's money, and you’re still obligated to pay it. Even if your spouse is absolutely faithful in making the mortgage payments, there’s another possible problem. Because you still owe a great deal of money on the house, it may be difficult or impossible for you to make another large purchase until you’re off the loan entirely.
Along with this, you should also have your spouse sign a Deed of Trust to Secure Assumption. This gives you the right to step in if they become delinquent, pay the past amount due, re-claim the home, evict them and sell the house. Even if you can trust your ex-spouse’s promise to take care of all future payments on the loan, you still shouldn’t risk putting your financial future in someone else’s hands. You can never be sure they will make all payments, not necessarily out of malice, but possibly due to financial instability or unforeseen health issues.
IMPORTANT TO NOTE:
If you are the party leaving the home, signing a Quit Claim Deed will not release you from the mortgage. Nor will it stop that loan from reporting on your credit report. The ONLY way to get the loan out of your name is for the house to be sold, or for your ex to refinance the loan into their name only.
The cleanest solution could be to refinance the mortgage to release one party from the obligation. Refinancing pays off the old loan, and replaces it with a brand new mortgage in one person's name only. Depending on the amount of equity in the home, refinancing is also a way to "cash-out" the other spouse that will be departing the residence. With a divorce, you can do a ‘cash out’ refinance with the usual pricing as a rate and term refinance, which generally are better costs/rates/terms.
Refinancing doesn't come without challenges though. If the remaining spouse does not have the income or credit necessary to qualify, they may need to obtain a co-signer to help them. Keep in mind that in a Community Property State (like Washington) if the divorce is not final, the ex will be required to sign and acknowledge the Deed and subsequently sign a Quit Claim Deed.
If you and your spouse decide against any of the previous options and decide on an arrangement in which you both remain deeded owners of the house for a long time in the future, or where you both remain on the loan indefinitely, or where you share some designated percentage of the proceeds of the sale of the house out in the future, STOP!
See if there’s not a way you could consider one of the aforementioned options. It will give you one less thing to argue about — one less thing to resent down the road.
I caution against this option because no matter how friendly it is now, things may not always stay that way in the future. There are too many things that can happen in the future that create possibilities to argue later.
Q. I got a divorce over 10 years ago where I signed a quit claim deed releasing me from the house, and he was assigned the mortgage. According to the decree, I am no longer responsible to make the payments. However, last year he got sick and got behind on payments and the bank is calling me to pay or the house will go into foreclosure. How can they do this when I am no longer on the house? Will this affect my credit?
A. When you bought the house, you signed 2 security instruments that were recorded at the county courthouse. One was the Deed of Trust and One was the Promissory Note. Think of the Deed of Trust like the title to a car, it's the ownership papers showing who owns the car, or in this case - the house. The Promissory Note is like a large IOU note to the bank, "promising" to pay the loan back.
Even though you and your ex came to the agreement that he would take the house, that does not release you from your promise to the bank to pay them back. After all, they approved the loan based on 2 incomes - they still expect you to fulfill your "promise" to pay them back. When you signed the Quit Claim Deed during the divorce, you only gave up your rights to the title and ownership of the house. A Quit Claim Deed does not release you from your promise to pay back the loan. Unfortunately the late payments will report on your credit report.
Q. 4 years ago I got divorced and was awarded the house. Recently my ex was sued over a business deal that went sideways, and the person that sued her has placed a lien on MY house for the amount of money they are owed. How can they do this?
A. If you bought the home jointly with your ex wife and she did not sign a Quit Claim Deed when you divorced, then technically the house is still an asset to her in which a 3rd party can come after if she owes them money.
Q. My ex wife and I bought a home 6 years ago, and we divorced 3 years later. In the divorce I was awarded the home and now I am trying to refinance it to get a lower rate. When we got to closing, the title company said that my ex wife must cooperate and sign papers, even though our decree awarded me the house. She is being difficult because she does not like my new girlfriend and I don't understand why I need her permission to refinance.
A. If you did not have her sign a Quit Claim Deed when you divorced, then her name would still appear on title as an owner, along with yours. Although you were awarded the home in the divorce, you will most likely have to take legal action against her for being in contempt of court. Until that time, you will need her cooperation to refinance or sell the home.