Now there's a topic that no one wants to think about. Unfortunately, it's an event that happens all to frequently. And...it is one of the last things people consider during the emotionally charged period surrounding a divorce. People think about it when they decide to refinance the house, sell the house and buy another, or attempt to do something that involves a mortgage and find out that the divorce decree and property settlement didn't adequately address the issue.
How could that happen? My attorney is supposed to take care of all that, right? I paid that guy good money, and a lot of it, to get it all squared away. Well, here's the thing-you may have the greatest divorce attorney on the planet- a real pit bull-but your attorney's expertise is in family law-not mortgages and the requirements of mortgage lending or maybe even the Federal Financial Reform Act and how it affects borrowers and what is possible or not with regard to mortgages.
Here is what we normally see with situations of divorce: One party or another decides to keep the house. The judge rules that the party that doesn't want the house must sign a quit claim deed relinquishing all interest in the property-which is the purpose of a quit claim deed. What the party not keeping the house doesn't relinquish with the execution of a quit claim deed is ownership of the mortgage. They are now in a tricky situation-they don't have any claim to the property that secures the mortgage but they still are liable by the terms of the mortgage. Typically the judge will also write into the divorce decree language that one or the other party will assume all responsibility towards the house and the house payments. Which is fine if the party to whom the house is awarded does exactly that-pays the mortgage, taxes, insurance etc. on time.
If that happens there are no issues and the party not responsible for the house can move ahead with their life-all is fine and dandy.
But guess what? Many times for one reason or another that doesn't happen. The person responsible for the house quits paying the mortgage. The first time the party that no longer owns the house will hear of it is when the mortgage company comes knocking on their door for payment. "Well, good grief," you say. "I have this divorce decree that says I am no longer responsible for this mortgage." That may be enough to get the mortgage company off your back, but the bad debt will still be reported on your credit report. Since you were never removed from the mortgage, anyone who is still attached to the mortgage will get the dubious benefit of that. Now your credit is all messed up. And, if the mortgage company hasn't informed you that your ex is in arrears on the house payment, you may hear about it when you are declined for a new mortgage, at the time you have decided to purchase a new home.
Let's not forget that there may be child support-that is added to the monthly debt ratio. So whichever party is paying child support is going to find that they have less- or maybe no buying power left. Which is not to say that I am for not paying adequate child support-what it means is-wouldn't it be nice to know how all this is going to affect you up front-rather than as a SURPRISE!!!!
In some cases obtaining cancelled checks showing who made the past 12 mortgage payments works to clear up any issues-but many people can't get those from an ex. In some cases the non owner spouse is stuck and can't do anything.
I bet you have a suggestion, Casey-you say. I do. It is never a bad idea if you are in the midst of a divorce to have a mortgage lender take a look at what you anticipate the property settlement is going to look like. That way you can assess the debts, potentially reduced income, and make a good decision about the current home and its disposition as well as what your mortgage potential is going forward.
My opinion is, that if the marital property is not going to be sold, there needs to be a refinance done in the name of the party that is going to keep the home as soon as possible after the final settlement.(That party needs to be sure they are qualified on their own income and credit to take out a new mortgage prior to the property settlement.) Then you have a clean break without the potential of a time bomb over which you have no control going off at some random time in the future. The party not keeping the home can move forward knowing their credit won't be hampered by the past.
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