Thursday, 09 April 2020

Divorce, Separation and Home Loans

Written by Posted On Sunday, 16 February 2020 05:30

Okay, I’m going to get into a bit of legal weeds here but not by very much. It concerns how lenders view an outstanding mortgage when a couple buys a home together then later, well, things just don’t turn out all too well.

When two or more people apply for a mortgage to buy a home, each person who will live in the home and on the application agree to be responsible for the mortgage payments. The legal documents signed at the closing table have language that obligates each individual and what can happen if they stop paying. Essentially, non-payment means the lender has the right to take back the home via foreclosure and sell the property to settle the outstanding balance.

Let’s look at a scenario where a couple gets married, applies for a mortgage and takes title as joint tenants. They live there, happily, for a few years and then later on the marriage begins to crumble. There are two types of crumbling, a separation and a divorce. There are also two types of separation, a legal and a verbal agreement. Let’s consider the verbal agreement first.

As it relates to the mortgage, the lender isn’t concerned about the union. It’s concerned about the promise the couple made to pay back the loan. In this scenario, the husband agrees to leave the property and the wife continues to live in the home. Further, they both agree to split the mortgage in half each month for 12 months until at which point the husband no longer has to pay any part of the mortgage. 

In the meantime, the husband wants to buy another home and get financing on his own. Yet because there’s an outstanding mortgage on the first home, his debt ratios are too high to qualify. He explains to the lender that he and his wife are separated and have agreed to split the mortgage payment. Unfortunately for him, that doesn’t matter. The mortgage appears on his credit report and he originally agreed to pay it. There are also other debts jointly owned such as a car loan and some credit card debt. Those debts are also legally his. Not just half of them, but all of them.

Now let’s look at a legal separation. This is a legal document signed by a judge that lays out who pays for what. Within the document, it clearly states that the wife is responsible for the entire mortgage payment while they will split the additional consumer debt. The husband applies for a mortgage and is told there are some other debts on the credit report that push his debt ratios too high. He provides a copy of his legal separation agreement that states the wife is responsible for the mortgage, not him. But the lender wasn’t consulted about such an arrangement and won’t let him off the note. 

A divorce runs much the same manner in most cases. The lender doesn’t have any control about someone’s love life but does have some interest in getting paid each month. The divorce decree clearly states the wife is solely responsible for the mortgage payment, even though the mortgage still appears on his credit report. He is still not released from his obligation to pay, even though it clearly says so in the decree. 

The wife agrees to pay the entire mortgage each month, but after a while she’s having trouble keeping up with the payments. Soon, one of the payments is listed as more than 30 days past the due date. This late payment will also appear on the husband’s credit report, even though their agreement states he’s not responsible for the mortgage. Again, the lender isn’t concerned about the marriage, just getting paid back. The only way to remove the husband from this responsibility is to get him off the note entirely. That means selling the home outright or the wife refinancing and qualifying on her own, obtaining a new mortgage and retiring the old.

With real estate and marriage troubles, obviously legal counsel is involved. Just know that unless one party is completely removed from the existing note via a sale or refinance, there’s still an obligation to pay.

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David Reed

David Reed (Austin, TX) is the author of Mortgages 101, Mortgage Confidential, Your Successful Career as a Mortgage Broker , The Real Estate Investor's Guide to Financing, Your Guide to VA Loans and Decoding the New Mortgage Market. As a Senior Loan Officer and Mortgage Executive he closed more than 2,000 mortgage loans over the course of more than 20 years in commercial and residential mortgage lending.

He has appeared on CNN, CNBC, Fox Business, Fox and Friends and the Today In New York show. His advice has appeared in the New York Times, Parade Magazine, Washington Post and Kiplinger's as well as in newspapers and magazines throughout the country.

Reed was the former Technology Chair for the Texas Mortgage Bankers Association, Board Member and President of the Austin Mortgage Bankers Association. He is married and a father of three in Austin.
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