Mortgages and Divorce–A Match *Not* Made In Heaven

A recent article in The Washington Post highlighted a common problem when a couple divorces: what happens to the mortgage?

In many divorce cases, one spouse keeps living in the family home. (We’ll call this person the “Home Spouse”). The Home Spouse wants to be listed as the sole owner of the property, while the other spouse (whom we’ll call the “Non-Home Spouse”) wants to be removed from liability for the mortgage. These are two completely separate matters.

The Non-Home Spouse wants his or her name off the mortgage for several reasons. First, if the Home Spouse makes late payments or defaults on the mortgage, so long as the Non-Home Spouse is on the mortgage, the Non-Home Spouse’s credit will be damaged. Second, the as long as the Non-Home Spouse is on the mortgage, it is still considered a debt—and a significant debt—for the purposes of the Non-Home Spouse’s credit rating. This means that the Non-Home Spouse might not be able to qualify for their own mortgage because of the substantial debt they’re still legally liable on with the Home Spouse. Finally, the Non-Home Spouse may simply want to eliminate all financial entanglements with the Home Spouse.

It is very simple to change the ownership of real estate in these circumstances. Both spouses sign a Quitclaim Deed transferring property to the Home Spouse. While this removes the Non-Home Spouse from the Deed, it has absolutely no effect on his or her continued liability for the mortgage.

Mortgages aren’t so simple.

While a Quitclaim Deed is a transaction involving only the two spouses, a mortgage adds a third party: the mortgage company. Normally, mortgage companies want as many people as possible liable on the mortgage. This way, if there is a default, there is a higher likelihood that there will be somebody who will be able to pay a deficiency judgment. Accordingly, when you ask the mortgage company to remove the spouse who isn’t living in the house from liability, it is likely to flatly answer, “No.”

The solution has generally been for the Home Spouse to refinance in his or her individual name and pay off the joint mortgage company, which releases the Non-Home Spouse from liability. Unfortunately, in today’s mortgage and housing market, this may be impossible. The house may have gone down in value, meaning that there simply isn’t enough equity to support a refinance. And given the tight money markets, a refinance may simply be unavailable.

As a result, the spouses may have to sell the house, or, if the value has dropped enough, they may even be forced into bankruptcy because of the excess liability for the unpaid portion of the mortgage.