Mortgage Questions Involving Divorce
Divorcing couples must address a number of mortgage-related questions.
Breaking up is hard to do, and divorces get a whole lot more complicated when the two of you own a home together. Even if you and your former partner are getting along and treating each other fairly throughout the divorce proceedings, your mortgage lender could throw a wrench into the process. Divorcing couples usually sell their home or if one party will keep it, have the retaining spouse refinance the mortgage. When these options aren’t feasible, the two of you could work together to rent out the home or negotiate a short sale. You have a handful of avenues to choose from, so there’s no need to lose sleep over the fate of your finances.
California and Community Property.
It’s of note that California is one of nine community property states, and this can change how your home gets handled when you divorce. If you bought your home after you got married, your spouse usually owns half of it even if they don’t appear on the deed. If your spouse took out a mortgage in their name alone after the two of you were married, don’t think you’re in the clear. The court may consider half the mortgage debt yours, and you’ll need to resolve that issue with the court, the mortgage lender or both. Any money earned during the marriage is community property, as well. If you bought a house before you were married but used community property money to pay the mortgage after you married, your spouse may now share ownership of the home. Make sure you understand who owns and owes what before deciding what to do about your mortgage.
Refinancing the Home.
If one of you wants to stay in the home and can afford to do so, you should refinance and get a mortgage in your own name. When you and your spouse received your mortgage, you likely did so as co-borrowers. This means the bank looked at both of your incomes and credit scores when making the loan and that also means both of you are responsible for making the mortgage payments. The bank won’t simply remove your name from the mortgage because the divorce decree say so. Instead, one spouse will have to get a new mortgage in their name only. This won’t create any issues if they have an adequate credit score and income. If they don’t, they will need to find a cosigner or another way to get approved. If they can’t get approved for a refinance, the existing mortgage will remain in effect and both you and your spouse will be responsible for it.
SELLING the Home.
If neither party wants to keep the home or can afford to do so, the simplest option is often to sell it. When you do, the sale proceeds are used to pay off the mortgage. If there is a profit, you should split it between the two of you, as part of your overall assets. If you come up a little short, each of you will pay half of the deficit. Some divorcing couples find themselves upside down in their mortgage, owing more than what the home is worth. In this case, selling could leave you owing more than you can afford to cover. In this instance, see if your lender will agree to a short sale. In a short sale, the lender lets you sell the home and accepts the price you get as satisfaction of your mortgage, forgiving the remainder of the debt. Remember that your lender must approve any offer you get on the home during a short sale and can turn down offers it deems too low. A short sale also results in your lender forgiving part of your loan, and some forgiven debt is taxable. Please consult a knowledgeable Realtor before beginning this process.
RENTING the Home.
If you and your divorcing spouse agree to sell your home but can’t for some reason, consider keeping the property as a rental. If, for example, if you’re upside down in the home and the bank won’t agree to a short sale, keeping the property until the market turns around is a smart option. If you rent the home to someone else, their rent can cover your mortgage until you’re in a better position to sell. If you go this route, it’s important to put in writing who will collect the rent money and what they will do with it. If your former spouse collects a rent check and fails to pay the mortgage with it as agreed, your lender will still have the right to come after you for the mortgage payment. You, however, will have the right to pursue your ex for failing to stick to your agreement. Clearly, this arrangement won’t work if you and your former spouse just can’t get along or work together. Renting the property until you sell may be a good option, however, for divorcing couples who are splitting up amicably.
If you and your spouse both appear on the deed to your home but only one of you is keeping it, you’ll need to file a quitclaim deed. This document relinquishes your ownership claim on the home and leaves it solely in the hands of your co-owner. It does not, however, absolve you from your responsibility for the mortgage or remove your name from the mortgage. If you sign a quitclaim deed before addressing the mortgage, you could find yourself paying for a home you no longer own. To avoid this, it’s best to be involved with escrow on the refinance when they refinance the home. That way you can sign the quitclaim deed through escrow and allow them to take possession of the house but do so knowing that your mortgage got paid.