When spouses who are jointly obligated on a mortgage are going through a divorce, options with regard to the existing mortgage are very limited. A refinance by one spouse will effectively remove the other spouse from the mortgage obligation and may result in a cash buyout if there is sufficient equity in the home. Sale to a third party may be the only other option if there is insufficient equity or the spouse who wishes to stay in the home does not qualify for a mortgage independently. In rare instances, a spouse may be permitted to assume or take over an existing mortgage.
If there is equity in the marital residence and one spouse wishes to remain in the home, that spouse may qualify for a mortgage independently, assuming they have good credit and sufficient income to qualify. The amount of equity in the residence and the financial resources of the refinancing spouse will dictate whether there will be a cash payout to the other spouse. At the very least, however, refinance of the mortgage by one spouse will remove the other spouse from the mortgage obligation.
The spouse who wants to keep the house must be able to qualify for a mortgage independently. Documentation of receipt of income from each source is required. Child support and alimony may be counted as income for purposes of qualifying for a mortgage. The underwriters are going to require verification of receipt of six to twelve months of this income, however. Fannie Mae guidelines require additional documentation concerning the continuance of support payments, such as the age of the children for whom the support is being paid or the duration over which alimony is required to be paid. A spouse who wants to keep the house should obtain a copy of their credit report: https://www.annualcreditreport.com/index.action, review it with a mortgage professional and take the necessary steps to correct balance errors or satisfy delinquencies in order to maximize eligibility for financing.
Provisions concerning transfer of the marital residence and obligation on a mortgage obligation are negotiated by counsel for the parties and included in property settlement agreements. If the spouse who wishes to remain in the home is unable to complete a refinance of the existing mortgage within a reasonable time period, the house should be listed for sale.
If there is insufficient equity to refinance the existing mortgage, or the spouse who wishes to remain in the home does not qualify independently for a mortgage, the other spouse will remain obligated on the mortgage indefinitely, or until the property is sold to a third party. If the mortgage goes into default during this time, it will negatively impact that person’s credit and ultimately result in a foreclosure action against both parties.
Sale to a third party may be difficult if the mortgage balance exceeds the market value. In that event, both spouses may have to cooperate with a mutually selected realtor to short sell the house. Approval from the mortgage company of sale proceeds for less than the amount required to pay off the mortgage is required. The spouses would receive not receive any proceeds from a short sale. There may be tax consequences imputed to them for the deficiency in net sale proceeds, unless the mortgage company agrees to release the parties from any liability. The deficiency will be reported on both parties’ credit reports.
Although rare, a spouse may be permitted to assume or take over the mortgage obligation under existing or modified terms. Payment of an assumption fee is often required.
In light of downward trends in the real estate market and fluctuating interest rates, it is important to review these options with an attorney, mortgage professional and or realtor in the early stages of litigation.
By Rochelle Bobman, Esquire