I receive a lot of inquiries after divorces are finalized about real estate given to one spouse or another in a settlement or judgment, and how to remove the non-owner spouse from the mortgage. The typical scenario is that in the course of negotiating a property settlement, one spouse receives the house and by virtue of the property settlement, becomes solely liable for the mortgage. Later, for whatever reason, the spouse who received the home discovers that their former spouse’s name is still on the mortgage, and that the former-spouse not only is still liable for the mortgage but has access to the mortgage account! Lately, the question comes up frequently when a client is seeking a loan modification or attempting a short-sale. They discover to their horror that the former-spouse’s consent and participation is going to be necessary to finalize any sort of change to the loan. What happened, and why has the client been suffering from the belief that the house was all theirs and that their ties to the former spouse had been terminated? As best I can tell, this is one of those “dirty little secrets” of divorce that doesn’t seem to be discussed prior-to agreeing and signing a settlement. Often times in the rush to finalize a divorce, some of the key factors just don’t get discussed, or get forgotten. I write to help clarify why this happens, and what a divorced spouse can do to remove their former-spouse from the mortgage account.
A mortgage is really just an agreement to repay money – a “promissory note.” A mortgage is obviously different from a simple loan in that the loan is secured by the home. If you default in your payments, the lender has the right to eventually foreclose the home to recover what it’s owed. Because mortgages are generally so large, lenders have in the past been very careful about who they will lend money to. They require substantial amounts of information proving that the borrowers can afford the mortgage, and are credit-worthy (i.e., pay their bills on time). This gives the lender some level of comfort that the loan will be repaid and that they won’t have to foreclose the property. Arguably, much of the loan crisis we are currently experiencing is the result of relaxed underwriting standards – loans were made to people who could never afford to repay them, or who had no history of repaying their bills on-time. Irrespective of what has occurred in the past, a mortgage is generally only given to people who the lenders believe can repay the loan. As such, they “relied” upon the income and credit of not just one spouse, but of both spouses when granting the loan.
After a divorce, many clients ask “Why can’t I just remove my husband/wife from the loan?” The simple answer is that the bank relied upon both husband and wife when making the loan; they have both husband and wife being legally responsible for repayment of the loan, so why would they let either borrower “off-the-hook?” The contract husband and wife had with the lender is not affected by the property settlement between husband and wife. The lender is not a party to the divorce, and the divorce court has no jurisdiction over the mortgage company. Essentially, as far as the bank is concerned what happened in your divorce is of no concern to them – you’re both still liable to repay the loan. As such, both borrowers have equal access to the loan and equal rights to participate in the loan. As such, any change to the loan requires the consent of all borrowers. There is no legal mechanism to get around this – the bank does not have to remove either spouse from the loan simply because you are no longer married.
The solution is not always simple. To remove one spouse, the loan must either be refinanced or the spouse who took the home must apply to formally “assume” the loan. In either case, the solo spouse now the owner of the home must have both the income, and the credit-worthiness to obtain a new loan. These days, a new factor has made this virtually impossible – if you are upside down in your house (you owe more than the property is worth), no lender (with some special program exceptions) is going to lend you more than the house is worth. As always, there may be some exceptions to these rules, but what I am seeing is that generally speaking, a property settlement without a forced trigger to either refinance or sell the home is a recipe for disaster. Without a provision requiring that the spouse retaining the home refinance the home in a set number of years, or that barring that, the home be sold, these two “divorced” persons will be tied together financially until the loan is paid off! It’s an ugly proposition, but one that is repeated almost daily in my practice. Before finalizing a divorce – particularly a property settlement – it is essential that both parties receive sufficiently expert advice to understand what the long-term ramifications of debt and property division ACTUALLY mean in the real world. If one spouse becomes liable for certain debt, you have to assume that at some point it won’t get repaid. If, like a mortgage, both spouses are liable, that too doesn’t change just because you are divorced. Understand that until it is all paid in full, and the account closed, the spouse who did not take the debt may still be liable to creditor in the event of a default.