Divorce and foreclosure often go hand in hand. If you find yourself facing a divorce, you may have questions about your current home mortgage, particularly who is liable for the debt after the divorce and how to avoid a foreclosure. Read on to get the information you need to help you through this difficult time.
(To learn the ins and outs of the foreclosure process, and foreclosure procedures in your state, visit our Foreclosure Center.)
Who Is Responsible for the Mortgage?
The first thing that a divorcing couple must first figure out is who is responsible for the mortgage debt. In many cases, when married couples first take out a mortgage, they obtain the loan and take title to the property jointly. In other circumstances, just one spouse may take out the mortgage and sign the promissory note.
Signing a mortgage and promissory note has important legal and financial ramifications. The note creates the promise to pay, whereas the mortgage creates the lien on the property. (Learn more about mortgages and promissory notes in our article What's the difference between a mortgage and a promissory note?)
If both spouses sign the mortgage and promissory note, they are jointly responsible for repaying the debt and would be liable for any deficiency judgment following a foreclosure (so long as state law allows lenders to sue borrowers to recover a deficiency). If only one spouse signs the mortgage and promissory note, then that spouse is solely responsible for repaying the debt and is the only person that the bank may pursue for any deficiency judgment after a foreclosure.
(To learn more about deficiency judgments, see our Deficiency Judgments After Foreclosure area.)
If One Spouse Wants to Keep the Home
The next thing that the divorcing should consider is who, if anyone, wants to remain in the home and make the monthly mortgage payments. (If this subject is not addressed, both spouses may neglect to make the payments and the house could easily go into foreclosure.)
Once you have determined which spouse wants to live in the home and remain responsible for paying the mortgage (and have decided to release the other spouse from liability on the debt), he or she can:
- assume the loan or
- refinance the loan into his/her name only.
If one spouse wants to keep the house, that spouse can assume the mortgage and take over responsibility for the loan. (Though he or she will have to obtain lender approval by showing sufficient income to make the monthly payments.)
Due on sale clause does not apply to divorces. If a mortgage contains a due on sale clause, then the mortgage generally cannot be assumed. A due on sale clause states that if the property is sold or conveyed, then the entire loan balance will be accelerated and the entire balance of the loan must be repaid. Most mortgages contain a due on sale clause.
However, under the 1982 Garn-St. Germain Act, lenders may not enforce a due on sale clause if a mortgage or the property is transferred as a result of a divorce decree, legal separation agreement, or a property settlement agreement (even if the mortgage is in default) (12 U.S.C. § 1701j-3(d)).
(Learn more mortgage assumptions and due on sale clauses in our article Avoiding Foreclosure: Can Someone Else Assume (Take Over) the Mortgage?)
Refinancing the Mortgage
If one spouse wants to keep the property, another option is for that spouse to refinance the property in his or her sole name to release the co-borrower from the debt. (In many cases, the terms of a divorce will require one spouse to refinance if he or she wants to keep the property.) In doing so, the former spouse is released from the responsibility of making future payments.
The spouse who remains in the home must rely on his or her own credit and finances to obtain the new loan.
If a loan was originally taken out by both spouses and the spouse who retains sole ownership of the marital home stops making payments after the divorce, but never took the necessary steps to assume or refinance the loan, the other former spouse is still responsible for repayment. The lender may then initiate a foreclosure, which will damage both spouses’ credit scores and could lead to a joint deficiency judgment. (Learn more in Nolo’s article Foreclosure and Your Credit Score.)
(To find out if you live in a state that permits deficiency judgments, check our Summary of State Foreclosure Laws.)
If No One Wants the Home
If neither spouse wants the house any longer, there are a number of options available to avoid foreclosure such as:
- selling the property to pay off the debt
- renting out the property and applying the rental income to the monthly payments
- arranging a short sale with the lender (when you make a deal with the bank to sell the home for less than you owe), or
- completing a deed in lieu of foreclosure (when a lender agrees to accept a deed to the property instead of foreclosing in order to obtain title).
(For more about the various options to avoid a foreclosure if you’re going through a divorce, see Avoiding Foreclosure During Divorce.)
Hiring an Attorney
If you are going through a divorce and are concerned about your liability for the home mortgage debt, it is recommended that you seek the assistance of a qualified attorney for legal advice about your particular situation.
(To learn more about the process of divorce, visit our How to Get Divorced topic area.)