Financial issues are consistently among the top reasons for divorce, so it’s not surprising that divorced couples often end up falling behind on their mortgage and facing foreclosure. And unfortunately, foreclosure—frustrating and stressful enough on its own—is often further complicated by issues unique to divorce.
Until debt do us part
It’s very common in divorces for one spouse to transfer their interest in the marital home to the other. It’s also very common for the transferring spouse to think that such a transfer relieves them of any liability for the mortgage—unfortunately, that’s not how it works.
If both spouses are listed as borrowers on the mortgage, transfer of the property alone will not remove a spouse from the mortgage. As far as the bank is concerned, both spouses are obligated to make sure the mortgage gets paid, regardless of whose name is, or isn’t, on the deed.
Should the mortgage go unpaid, foreclosure will be filed against both spouses, both spouses’ credit will be affected, and both spouses will face the potential of a deficiency judgment (a judgment ordering payment of any deficiency between what was still owed on the mortgage and what the property sold for at foreclosure). Unsuspecting spouses often find themselves dealing with foreclosure after divorce on a home they no longer live in, nor own.
And so, until proper steps are taken to clarify financial responsibility for the mortgage, divorce may not be the final and complete separation that a couple was hoping for.
Happily ever after
Despite the inherent challenges involved, it is in the best interests of divorced couples to work together towards a solution that effectively carries out their intentions and allows both spouses to move forward without uncertainty regarding their financial obligations or fear of foreclosure.
Potential solutions include:
Assumption. If one spouse is going to remain in the property, that spouse may be able to assume the mortgage. This means that the assuming spouse would take over all responsibility for making the mortgage payments. The non-assuming spouse would be released from all liability for repayment or future foreclosure.
Refinance. The spouse keeping the property may be able to refinance the mortgage. Similar to assuming the mortgage, refinancing will completely remove the other spouse from all liability. The refinancing spouse will have to rely solely on his or her own credit and finances in order to qualify.
Loan Modification. Once a divorce is finalized, and a divorce decree has been issued awarding the property to one spouse, the bank may be willing to allow that spouse to apply for a loan modification without the other. If a loan modification is approved, the other spouse will be completely removed from the mortgage and released from all liability for repayment or future foreclosure. Note that this varies from lender to lender, and some lenders are not willing to release one spouse from the mortgage without refinancing.
Hope for the best, plan for the worst
Regardless of which solution a couple chooses to pursue, it’s a good idea to anticipate the possibility that their plans may not work out. Any separation agreement or divorce decree needs to place a time limit on a spouse’s attempt to take advantage of these options. For example, if a spouse is unable to remove the other spouse from the mortgage within one year after separation or divorce, then there could be a provision requiring that the house be sold.
Unfortunately, no matter how well thought out, divorce and properly separating financial liability for the mortgage can be a difficult process. There are several factors that must be taken into account in order to properly protect each spouse’s interests.
This is all good advice, but those looking at a possible divorce which also potentially involves foreclosure should consult with a licensed attorney who can work with you to take advantage of available options, and help prevent future surprises or conflict. With the right help, it’s possible for spouses to go their separate ways and both be happy with the outcome.