Getting a loan 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 modifications and how divorce can affect your mortgage loan. And then find out when it’s best to apply for a modification if you’re going through a divorce.
A modification is a change to your existing loan terms to (hopefully) make your monthly payment more affordable. Modifications typically involve:
(To get information about loan modifications and some other options to avoid foreclosure, see What's the difference between a loan modification, forbearance agreement, and repayment plan?)
When a married couple buys a home, they usually take out the mortgage loan jointly. In this scenario, both spouses sign the promissory note and mortgage (or deed of trust) are legally responsible for repayment of the loan.
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 doesn't affect the loan contract. As far as the lender is concerned, both spouses are still liable to repay the debt. In most cases, the lender will not remove a spouse from the loan documents to 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 loan contract 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 Avoiding Foreclosure During Divorce.)
If you decide to go the 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's possible to apply for a modification while the divorce is pending. But if both spouses signed the original loan documents then both spouses will usually 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 likely 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're 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're 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 might be easier for the spouse who's 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—referred to as a “financial hardship.” Most lenders accept divorce as a valid financial hardship.
Also, generally speaking, the higher your debt load is in relation to your income, the easier it is to qualify for a modification (assuming it's not too high). Because you’ll have to rely on just your income to pay the mortgage loan and your other household debts after a divorce, this means you’ll have an increased debt burden. As a result, you might 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.
If you're having a difficult time trying to figure out when and whether you should apply for a 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.