Going through a divorce can be a traumatic time for anyone. Although the love may have faded away and you want to part ways, the home you've acquired while married can turn into a major obstacle for both parties.
Despite the fact the divorce decree states that your ex will take care of the property and mortgage payments, it's crucial that you realize this will not remove your liability from the loan obligation. When you signed the loan documents, you mutually agreed to repay the loan until the debt has been satisfied. Before the housing market collapsed in 2008, divorcing couples had no problems selling their property, splitting the equity and parting ways. But times have definitely changed..
Generally, mortgage debt is the largest investment a divorcing couple has to split - and divorcing a mortgage isn't as simple as one may think.
To remove one spouses liability from the mortgage, the property will either need to be sold, refinanced or assumed. One can always choose to keep themselves on the mortgage, but this is a risky position if the other spouse happens to default on the loan. We've come across thousands of homeowners in this situation here in our forum, and below we'll help you understand your options during these strenuous times.
Quitclaim Deed or Interspousal Transfer Grant Deed
A quitclaim deed is a document that transfers any interest an individual has in a property to another. They can be utilized to transfer interest from one spouse to another, but it does not eliminate the liability for the associated debt. If your name is attached to the loan and you quitclaim your interest to the remaining spouse, don't be surprised if the lender comes after you for a missed payment, or even worse - foreclosure.
Interspousal transfer grant deeds are also sometimes used in a divorce situation. This makes it simple to transfer interest from one spouse to another and also to change community property into separate property. The process is similar to that of a quit claim deed. You'll need to sign these together with a notary and it's always wise to consult with an attorney to make sure it's filled out accordingly.
Sell the Property
Generally, the easiest and most effective way to get both names off the mortgage and to remove liability from the debt is to sell the home. The sale can pay off the existing mortgage, and any left over proceeds can be split between both parties. It may be more convenient to try to sell the property before the divorce is complete to help avoid any future problems over the sales price. Additionally, this benefits both parties as you'll not have to worry about the other spouse managing the monthly payments, maintaining the household, or paying property taxes and insurance.
But since the housing crash, selling the home is easier said than done - especially when you are underwater (i.e. owe more on the mortgage(s) than the home is worth). Underwater homeowners are forced to either come up with the difference between the home value and loan amounts, or pursue a short sale. Be advised that with any short sale, your credit score will be negatively affected and you both may still be liable for the difference the lender has forgiven - unless the lender has agreed (in writing or by law) to waive their rights to the deficiency.
Refinance the Mortgage
Having one spouse refinance the mortgage into their name only is another very effective way to remove one's liability from the mortgage. This can be a simply fix - as long as:
1. There is sufficient equity to qualify for a refinance. Keep in mind that there is currently one refinance program available for underwater homeowners. That is the Home Affordable Refinance Program (HARP), for this program your mortgage must be owned by either Fannie Mae or Freddie Mac.
2. The remaining spouse is financially stable and has the income and credit to secure a loan.
3. Both spouse mutually agree to the transaction and allow one party to remain in the home.
Typically, the spouse that wants to keep the property will pay off the other spouse's equity share while refinancing the loan into solely their name. It's suggested to include a quit claim deed to extinguish any rights the other party has to the home. It's crucial that you make sure the home is only refinanced into one spouses name. This will ensure that the spouse who did not keep the home is safe in the event of a default or foreclosure on the property.
If the divorce has not yet been finalized and you've already decided who will be keeping the property, it's a good idea to include in your divorce decree who will be refinancing the loan. This way you can prove that both parties have come to an agreement as to who will be taking over the home and mortgage payments.
Before considering taking over the home yourself and becoming fully responsible - ask yourself: Can you truly afford to keep the home and would you like to continue living there once you have moved on? Homes consist of memories and times shared with love ones, this can make it that much more difficult to move on with your life. Think of it this way, would you consider buying this home if you were single and out browsing for a place to live?
A mortgage assumption is one option that is not brought up all that often. Why? Because they are very rare these days. Another main reason why is because not all mortgages are assumable, and even if they are, many mortgage lenders tend to be hesitant to do so. Therefore, your only way to find out is to call your servicer and see if this is a viable option.
If the mortgage lender will allow one party to assume the loan, you'll begin the process by completing an assumption agreement and a release of liability. The bank will also require your financial documentation to determine whether or not the mortgage can be handled based off one borrower's income. If you do meet the requirements, you may also have to provide a copy of your divorce decree and quit claim deed. If the assumption is approved, one spouse will receive a release from liability.
For homeowners going through a divorce, an assumption may be a good option to explore (if your loan allows you to do so). While there may be a few small fees associated with an assumption, they are usually much less than the fees that will come along with a refinance.