Think twice about allowing your spouse to keep the house without removing your name from the obligation.
Something I have seen a great deal recently are cases in which one party has allowed the other party to keep the family residence as part of the asset division in the divorce and has remained on the mortgage loan.
This was done quite frequently prior to 2009 with the anticipation that the party keeping the family residence would simply refinance the loan and remove the other party from the mortgage.
While this may have seemed like a good solution prior to the end of easy credit when there was no requirement that a person show they could actually repay the loan, now it has put the person who stayed on the obligation without retaining the asset in deep trouble when the party keeping the home found themselves unable to make the mortgage payments.
If you stay on the mortgage, you are obligated to make the payments to your mortgage holder, period. Even if your divorce judgment makes it clear that the party keeping the home must make the payments, this is not binding on your mortgage holder. They are not required, nor will they usually, take your name off of the loan obligation. Your mortgage bank wants to make sure they are paid and they have a better chance of that if they keep you obligated to repay the loan even if the house is no longer in your name. The only way out is to pay off the mortgage, which is usually done through a refinance or sale. But unless you have excellent credit and can demonstrate an ability to repay the loan, you are unlikely to qualify for refinancing in today’s tight credit market. And if, like many other people, you find that your home has no equity, or worse, negative equity, a sale will not help.
Even worse, if the home was refinanced or you live in a state that has recourse loans for any deficiency, you may still owe on the home after it is lost to foreclosure or sold for less than what is owed on the mortgage. Once your home is refinanced, the mortgage is no longer “purchase money” and protections from “anti-deficiency” laws will not apply. This also applies to equity lines and second mortgages. If your home is sold for less than is owed and your mortgage bank agrees to a “short sale,” thereby forgiving the balance that would be due to them, the IRS may tax you on the portion of the loan the bank has forgiven.
Any way you look at it, if you are obligated to pay for an asset that now belongs to your former spouse, you could find yourself in deep financial and/or credit distress through no fault of your own!
If you are thinking about allowing your spouse to keep the house without refinancing to remove your name from the obligation, you might want to think twice. At least, if you are going to take the chance and remain on the loan, have something written in your settlement/judgment that has a remedy if the other party fails to make the payment. It could save your credit, savings, job and perhaps your sanity if you hope for the best and plan for the worst.
