Mortgages, Divorce and Separation

Written by Posted On Friday, 04 September 2020 05:00

Okay, so let’s say a couple meet, start dating and later on down the road they decide it’s best to tie the knot and live happily ever after. Yet unfortunately, many such unions don’t make it all the way. Sometimes the couple decides to maybe take a breather from the partnership and live separately. Just to think things through with a clear head. When this decision is made, many times they decide to separate before nulling the marriage entirely. As in most such situations, there’s a lot more that needs to be addressed, especially as it relates to money. If there’s a mortgage involved, there can be a difference between what the couple decides and what the mortgage lender thinks. It’s important to mention at this point that this isn’t considered legal advice, just how mortgage companies are involved.

First, note here there is a legal definition of a separation. A couple who independently decide to take up different residences doesn’t let one party off the hook for the mortgage payment. After all, if it took two incomes to qualify for the existing mortgage, a lender will want to know if anything substantial changes. They both signed the note at the outset and they both obligate themselves to pay the mortgage each and every month. Many such situations have one spouse staying in the purchased home while the other moves out and finds another place to live. It may also be that one party declares responsibility for the mortgage payment. So far, this is nothing more than an agreed-to arrangement. 

But that can present a problem for the individual moving out of the home and looking to buy another. It’s quite possible that when trying to qualify for a mortgage to buy another property, that person can’t qualify because of the outstanding mortgage payment. Even if the couple decides between themselves who is paying for the mortgage and who is not, the lender is not involved in those discussions. An in-person agreement does not remove one party’s responsibility for making the mortgage payment each month. 

A legal separation might carry a bit more weight. A legal separation spells out in the court documents who is responsible for what. The document is signed by a judge and recorded in public records. If the document states one party is going to be making the payments, that might help offset the debt. But probably not. The lender doesn’t really care if the marriage is on the rocks. It cares that its mortgage might be on the rocks. The obligation will typically still remain on both parties’ credit report, even if the separation agreement spells out who is paying for what.

A divorce works in a similar manner. The divorce decree also spells out who gets what asset and who is responsible for a variety of matters accumulated over time. If one party assumes the mortgage, the lender can remove the monthly debt from one party but in order to completely remove one party from the transaction, not only will the occupying spouse need to refinance the existing mortgage into his or her name, but also to quit claim ownership from one party to the next. Both the mortgage and title need to be taken into consideration. Still, the lender will have a say.

Some lenders want to see the monthly payments be made in a timely manner over a specific period, say for twelve months. Once it’s been demonstrated the payments have been made, there can be a case for removing the non-occupying person from any future obligation. 

If a marriage doesn’t work out, getting one party off the note legally is a process, not just a marital agreement.

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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.

www.cdreed.com

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