Getting a mortgage modification while you’re going through a divorce can be tricky. You’ll need to get your timing right and make sure all your ducks are in a row. Read on to learn more about mortgage modifications and how divorce affects your mortgage loan. And then find out when it’s best to apply for a mortgage modification if you’re going through a divorce.
A modification is a change to your existing mortgage loan to make your monthly payment more affordable. Mortgage modifications typically involve:
(To get information about loan modifications and other options to avoid foreclosure, see our Alternatives to Foreclosure area.)
When a married couple purchases a house, they usually take out the mortgage loan jointly. In this scenario, both spouses are legally responsible for repayment of the loan.
Divorce does not alter the mortgage contract. If the couple later divorces, the issue of what will happen to the home and the responsibility for the house payments can get complicated. If one spouse keeps the home and the other moves out, this new arrangement does not affect the mortgage contract. As far as the lender is concerned, both spouses are still liable to repay the loan. In most cases, the lender will not remove a spouse from the mortgage (or relieve him or her from the responsibility to repay the loan) simply because the couple is no longer married.
There are a few ways in which you can remove one spouse from the mortgage and eliminate that spouse's legal responsibility to repay the debt.
(Learn more about your options for handling your mortgage obligation if you are getting a divorce in Nolo’s article Avoiding Foreclosure During Divorce.)
If you decide to go the mortgage modification route, the next question is: When is the best time to apply to modify the mortgage? Before or after the divorce is final?
If one of the divorcing spouses wants to keep the home, it is possible to apply for a modification while the divorce is pending. However, if both spouses signed the original loan documents then both spouses will have to sign the modification documents. That means both spouses will remain responsible for repaying the loan. If one spouse won’t agree, this can kill the deal.
Even if divorcing spouses agree to complete a loan modification and jointly sign the documents, this usually isn’t a good idea – particularly if you’re the one moving out of the home and you expect your ex-spouse to make the payments. Here's why.
You'll be on the hook for many years. Once you sign a loan modification, you're obligated to repay the modified loan. The loan will most likely be around for 30 or 40 years and if your ex-spouse doesn’t make the payments, the lender will look to you for the money -- even if it's years from now when your ex-spouse defaults.
Your credit could take a hit. In addition, you are putting your credit on the line by signing the loan modification paperwork. Your credit will take a major hit if your ex-spouse falls behind on the payments. (Learn how a mortgage default or foreclosure affects your credit.)
Once a divorce is finalized and one spouse is awarded the home, then he or she can apply for a mortgage modification solely. The other spouse will be released from liability on the loan and his or her signature will not be needed on the modification documents. (Of course, this is subject to the terms in the final divorce decree. Sometimes the divorce decree will require the spouse that is keeping the home to refinance the loan instead.)
This is usually the best way to handle the modification if you are getting divorced. Here's why:
The spouse without the house won't be on the hook for the loan. If one spouse modifies the mortgage in his or her own name, the other spouse won't be liable for the loan.
Easier to qualify for a modification. It may be easier for the spouse who is keeping the home to qualify for a modification after the divorce is final. This is because one of the eligibility requirements for getting a loan modification is that you must be facing a long-term inability to make your current mortgage payments. (This is referred to as a “financial hardship.”) Most lenders accept divorce as a valid financial hardship.
For example, under the Home Affordable Modification Program (HAMP), which was launched by the Obama administration in 2009, one acceptable reason for failing to keep up with your current payments is that your household income has been reduced due to divorce. (HAMP is currently the main game in town when it comes to getting a mortgage modification. Learn more about The Home Affordable Modification Program.)
Also, generally speaking, the higher your debt load is in relation to your income, the easier it is to qualify for a modification. Since you’ll have to rely on just your income to pay the mortgage and your other household debts after a divorce, this means you’ll have an increased debt burden. As a result, you may have a better chance at getting a modification.
However, keep in mind that you still must have sufficient income to support a modified payment. Having too much debt and too little income will significantly hurt your chances at getting the loan modified. (Learn more about applying for a modification in Nolo’s article Do It Yourself Mortgage Loan Modification.)
If you are having a difficult time trying to figure out when and whether you should apply for a mortgage modification, you should seek the assistance of a qualified attorney who can inform you about which options are available and can help facilitate the transaction.