Divorce and Mortgages: What You Need to Know

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Even for those parting on amicable terms, divorce can be a complex and emotional process. One of the most significant decisions you will face is figuring out what will happen with the marital home. Perhaps you and your spouse have lived in your family home for many years, but your post-separation finances make it impractical for either of you to keep that home. You have several options, including selling the home or having one spouse buy out the other spouse’s interest.   From tax consequences to replacement value, there are many factors to consider when deciding whether to fight to keep an asset, give it to your spouse, or have it sold.

The first issue regarding the family home is often deciding who will retain possession of it while the divorce is pending. Many couples, especially those that rely on two incomes, have no choice but to sell their home, pay off their loan, and split the remaining money. The second option is to buy out your spouse’s share and refinance your mortgage. When you refinance a mortgage, you take out a new loan to pay off the old mortgage while relieving your former spouse of any liability.  Absent a refinance the mortgage will remain in the name of both parties who initially financed the home.

It’s likely that if your spouse agrees to let you keep the home you will be required to refinance the mortgage. There may be several reasons they would ask you to do so. First, the mortgage company cannot be forced to take your spouse’s name off the mortgage note. The lender could collect against your spouse even if your settlement agreement or divorce judgment contains a hold-harmless language.

A hold-harmless provision is intended to protect a person if their former spouse fails to follow a court order to pay a debt after the divorce is granted. If this debt falls to you in the divorce and you fail to pay, the creditor may attempt to collect from your former spouse, even if they agreed to let you keep the house. The court lacks the power to change the creditor’s rights and can issue orders affecting only you and your spouse. The only way your spouse can ensure that your failure to pay the mortgage will not adversely impact their credit score is to have you refinance and remove their name from the loan.

The second reason may be that your spouse may not want to wait to receive a share of the home equity. In this case, you may be able to borrow additional money when you refinance to pay your spouse their share of the equity.

Lastly, remaining on a mortgage may prevent your spouse from buying a home in the future. Because the mortgage company could pursue your spouse for the debt, a second lender will not likely want to risk extending your spouse’s further credit.

Rocket Mortgage reports that in cases where a former spouse keeps the house and misses or is late on any mortgage payments, it can negatively affect the other spouse’s credit score. By refinancing, you can remove your name from the mortgage and ensure that you won’t be held responsible for any debt left.

When you’re going through a divorce and in the process of dividing property and planning your financial future, in addition to a qualified financial adviser, you need expert legal counsel. The divorce attorneys at Schoenberg Family Law Group, P.C., help clients establish priorities, choose their battles, and secure their fair share of the estate so they will emerge from the divorce in the most advantageous financial position.

by Debra Schoenberg

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Schoenberg Family Law Group, P.C., recognizes that family law matters involve complex, sensitive issues that can have a lasting impact on you, your family, your finances and your future.

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