Getting off the Hook

The largest single asset I deal with in any divorce is a family residence.  Home ownership in the United States has hovered between 63-69% over the last 20 years.  In California the percentage is a bit lower coming in at 53% in 2015 – no big surprise when the median home price in California is $450,000.  However, with the “purported” divorce rate of 50% of marriage, the intersection of homeowners and divorces is fairly common.

We have blogged in the past about the myriad of issues that can impact the division of a family residence.  Honestly these issues are endless.  This is probably because we deal with dividing the interest in a family home so frequently.  The focus of this blog will be to address the mortgage associated with your home when you get divorced.  For those of you with a mortgage free home – about 30% of America – well done you can stop reading now.   For the other 70 percent of us…keep reading.

Just because a party to a divorce is awarded a home – either in exchange for other assets or by buying the other party out of the equity – does not mean they are off the hook for the mortgage.  The reason is simple.  The bank that gave you the mortgage does not care who is on title to the home, they only care about what name is on the loan.  You see when a party is awarded a home, all that happens is the title to the home is transferred to their name.  Typically, the party receiving the home will agree to assume the debt, but again, your mortgage lender could not care any less about what your divorce judgment says.  They only care about being paid.  So now you have one party who owns the home and two parties that are on the hook for the debt.  So what are you going to do to fix this?

There are two ways to have your name removed from a mortgage.  The first (and easiest way) is to sell the house.  In that way, both parties are removed from the loan and the mortgage company is paid off.  The mortgage company will record a conveyance in the county you live in to put the world on notice that you are no longer responsible for the debt.  This is a great way to deal with the mortgage if neither party cares about staying in the house.

The second option is keeping the family home.  There are several reasons a party decides to keep the family residence.  Often it is to reduce the amount of disruption to the family if there are children.  In this case, you will need to get an agreement that the party who receives the house will refinance the residence so that the loan is in their name alone.  This is easier said than done.  There is simply no guarantee that anyone will qualify for a refinance.

I address this issue by building in safeguards for my client if the other party receives the house in the divorce.  Typically, this will include a provision that the party receiving the house has 6 months after the entry of Judgment to refinance the house and remove my client’s name from the loan.  If that party fails to refinance or otherwise have my client’s name removed from the mortgage, the house must be immediately listed for sale.  This is not a full proof plan, but it does avoid further delays if the party who received the house is not able to qualify for a loan in their own name.  I also will include a provision that allows my client to make any past due or late mortgage payments with an automatic right of reimbursement (with interest) from the sales proceeds of the residence.  This allows my client to protect their credit score and helps to guarantee reimbursement of any out of pocket costs.  I have been able to recover the payments my client made from the sales proceeds in the few cases this has happened.

So why is this all important? The simple answer is your credit score.  Until your name is removed from the loan, potential creditors will still see that you are obligated to pay a mortgage and it will impact your income to debt ratio.  If you are applying for a credit card this is not going to be a huge issue initially, but if you ever want to buy another home, it will be difficult to explain to your lender why they should trust you with two mortgages.

Another issue affecting your credit is whether you trust the other party to make the payments timely.  If the other party makes late payments or skips payments entirely, that can spell disaster for your credit score.   Sadly, no amount of crying or explanation to the credit agencies will change your credit score.

This blog is not intended to dissuade anyone from agreeing to award the family residence to the other side.  In fact in many cases it is the best option available.  What is important is that you discuss all of the risks associated with such an agreement and what options exist to protect you and your credit should there be any issues down the road.  Only an experienced and qualified family law attorney can provide this advice.

Feel free to contact us if you are considering a divorce from your spouse, a legal separation, or have questions regarding the mortgage on your family residence. Nancy J. Bickford is the only Certified Family Law Specialist (CFLS) in San Diego County who is also a licensed Certified Public Accountant (CPA) with a Master of Business Administration (MBA). Don’t settle for less when determining your rights. Call 858-793-8884 in Del Mar, Carmel Valley, North County or San Diego.

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