Dividing assets in a divorce is never easy, and it’s especially difficult in the case of high-value, emotionally charged property such as the marital home. Unless you own your home outright, however, the mortgage loan is a liability that stays with you for as long as your name is on it, even if your spouse takes possession of the house. A divorce judge can rule that the spouse who keeps the home must also pay the full mortgage, but because the promissory note constitutes a contract between the lender and you and your spouse, it’s not affected by the judge’s ruling. If your spouse defaults, you’re still responsible for repaying a loan on a home you no longer own. Therefore, it’s important to either reduce your risk or remove your name from the loan.
Mitigating the risk
You and your spouse can negotiate an arrangement in which you stay on the mortgage, whether or not you contribute to the payments, in exchange for retaining ownership interest as a joint tenant or tenant in common after the divorce is final. You’ll still be responsible for the loan repayment, but you’ll retain some degree of ownership, and share in any future appreciation in value.
As joint tenants, you and your spouse must acquire equal, undivided interest at the same time. If one of you dies, the other automatically inherits their share. As tenants in common, on the other hand, you can have unequal interest—75 percent for the spouse and 25 percent for you, for example—and you can acquire yours at any time. You can each sell or bequeath your shares as you see fit.
To assume a loan is to transfer it. In this case, it would be transferred to your spouse alone, which relinquishes you of responsibility for paying it. Your promissory note states whether your loan is assumable, and your lender can give you details about specific requirements.
Generally speaking, your spouse must submit financial information demonstrating an ability to continue making on-time payments without relying on your income. Because a mortgage assumption continues an existing loan rather than starting a new one, it’s usually the easiest and fastest way to remove one spouse from a loan.
If the loan isn’t assumable, your spouse can take out a cash-out refinance loan that pays off the existing mortgage with a brand new loan—a first mortgage without your name on it. The amount your spouse can borrow depends on how much equity you have and your spouse’s creditworthiness. If you give up your interest in the home, you’ll do so by recording a quitclaim deed with the county registrar’s or deed recorder’s office. The process is simple: just fill out a form and pay a modest fee. You’ve officially “quit” your “claim” to the property when the deed has been recorded, or filed, so that it’s public record. It’s difficult to give up title to a home that’s part of your family’s history, but digging out from under the responsibility of the mortgage may also bring some relief. If you have any further questions about how things will go during your divorce, contact Reneer & Associates.