Divorce and foreclosure often go hand in hand. If you find yourself facing a divorce, you might have questions about your current home mortgage, like who's liable for the debt after the divorce and how can you avoid a foreclosure. Read on to get the information you need to help you through this difficult time.
The first thing that a divorcing couple must first figure out is who's 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 might 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.
If both spouses sign the mortgage and promissory note, they're 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. But if only one spouse signs the 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.
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 isn't addressed, both spouses might neglect to make the payments and the house could easily go into foreclosure.
Once you've determined who 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), that person can potentially:
If one spouse wants to keep the house, that spouse can usually assume the mortgage and take over responsibility for the loan.
Due-on-sale clause and divorces. If a mortgage contains a due-on-sale clause, then the mortgage generally can't 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. Many mortgages contain a due-on-sale clause.
But under the federal 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—even if the mortgage is in default. (12 U.S.C. § 1701j-3(d)).
Though federal law preempts state law, the Garn-St. Germain Act gave states that previously had enacted due-on-sale restrictions a three-year window to reenact the previous restrictions or enact new restrictions. Only a few states acted within this window period. Consequently, due-on-sale provisions in documents governed by the law of those states are not preempted by federal law. (To learn more about mortgage assumptions and due on sale clauses in our article Avoiding Foreclosure: Can Someone Else Assume (Take Over) the Mortgage? For details about the law in your state, talk to an attorney.)
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 both spouses originally took out the loan 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 lender might then initiate a foreclosure against both parties. The foreclosure will damage both spouses’ credit scores and could lead to a joint deficiency judgment. (To find out if you live in a state that permits deficiency judgments, check our Key Aspects of State Foreclosure Law: 50-State Chart.)
If neither spouse wants the house any longer, there are a number of options available to avoid foreclosure like:
(For more about the various options to avoid a foreclosure if you’re going through a divorce, see Avoiding Foreclosure During Divorce.)
If you're going through a divorce and are concerned about your liability for the home mortgage debt, it's recommended that you seek the assistance of a qualified attorney for legal advice about your particular situation.