In many marriages, the biggest asset (or debt depending on the real estate market) is the family home. Many couples own a home together and owe a considerable amount of money to the bank. This is especially true for any couples that purchased a home before the real estate downturn beginning in 2008.
As part of any divorce proceeding, a property division is often one of the most difficult aspects of reaching an agreement prior to trial. Many parties agree one spouse will essentially buy out the other spouse. The problem may arise when the bank is not a party to this agreement and doesn't agree to remove one former spouse from mortgage. This leaves the spouse who did not get the house in a somewhat unpleasant position. They have no legal interest in the house, but his or her name is still on the mortgage. If the spouse living in the house stops making mortgage of payments, the house can be foreclosed upon. While this may not seem like a problem to the spouse who did not get the house, it will become a problem when he or she finds out the foreclosure will destroy his or her credit rating.
As our Birmingham divorce attorneys can explain, it is important to address the mortgage during the property division phase of any settlement agreement or during trial if the parties cannot settle. Even issuing a quitclaim deed to the other party will not release the granting party from being a party on the mortgage. However, it will legally transfer any equitable interest to the other party. Having no property rights and still being on the mortgage is not a situation anyone wants to be in.
A recent news article from AZ Central addressed this issue. The question posed the question of how one party could remove his or her name from the mortgage during the divorce proceeding. The problem is that parties often form an agreement that the party getting the house will be responsible for continuing to pay the mortgage each month. Unless the bank agrees to take one spouse off the mortgage, we will find ourselves with the problem we just discussed.
The best course of action, if possible, is for the party getting the house to apply for a new mortgage in his or her own name. This will require a series of steps to happen for it to work. The first consideration is whether there is any equity in the home. If this is the case, a party may be able to get a loan and use the equity as a down payment on the new mortgage, assuming other party is in agreement. If parties owe more than the home is worth, meaning they are upside down, it may be difficult to get a new loan on the house. It may be also be a problem if the spouse getting the house does hot have a good enough credit score to qualify for a new mortgage without their ex's income.
Woman stuck with name on mortgage despite divorce, April 3, 2015, AZ Central