Divorces can be painful. They can also be complex and confusing, particularly when it comes to mortgages. Who owns the house? Who bears the responsibility for payments? Whose credit is affected by default?
Sorting out the myriad legal and financial issues that accompany a divorce requires the expert help of both a lawyer and a mortgage company, like A and N Mortgage. To help you understand how a divorce affects your mortgage, we’ve discussed a few of the problems you might face during the proceedings.
Splitting the House: The Buyout Option
It’s one of the most common questions facing divorcing couples: Who gets the house? That sounds like a simple question. It’s not. Here’s why:
Splitting the house typically requires a buy-out. In other words, if a husband decides to keep the house, then he’ll have to pay his ex-wife her full share of the home. If the couple decides on a 50-50 split, then the husband must pay 50 percent of the equity. That means figuring out how much the house is worth, and how much equity the husband and wife currently have in the home.
To put that in real numbers, let’s say a couple owns a house valued at $500,000. They still owe $300,000, which leaves them with $200,000 of equity. Split $200,000 in half, and each party has a $100,000 interest in the house. In order to buy out the departing spouse, the party who wants to keep the home must then come up with $100,000 on the spot. For many people, that’s a tall order, which makes a simple buy-out far from appealing.
Refinancing the Home
The other option is to refinance the home and place the new mortgage in the name of the spouse who wants to hold onto the home. Unfortunately, many couples believe they can work out an agreement without contacting their mortgage lender and refinancing their home. Nothing could be further from the truth. In the end, if your name is on the mortgage, you are liable for the payments, whether or not you are living in the home.
In fact, there are only three ways to take a name off of a mortgage—a sale, an assumption, or a refinance. If one spouse wants to keep the home, only a refinance will absolve the other party of liability. Even if the departing spouse obtains a legal decree that places the burden of payment on the other party, the bank or mortgage provider can demand payment from the non-owner as long as his or her name is on the mortgage. Of course the wronged party has the right to sue the spouse in order to recover the damages, but that often takes time and costs a fortune in lawyer’s fees.
Deed Versus Mortgage
There is one more thing to consider when sorting out the details of a mortgage after a divorce. That is the difference between a deed and a mortgage. Unfortunately, many people confuse the two when they are, in fact, two separate things, involving two very different legal issues. As part of a divorce settlement, a husband can easily remove his name from the deed, leaving his wife in sole possession of the house.
That does not mean, however, that he is free of the mortgage. To the contrary, if his name is still on the loan papers, then he is still responsible for the monthly payments. Whether or not the home is in his name, the lender will hold him responsible for missed or late payments. That means that if his ex-wife falls behind on her payments, his credit will suffer. Having his name on an existing mortgage might also affect his ability to get a new mortgage. Thus, when drafting a legal agreement, be sure to distinguish between who holds the deed and who is responsible for the mortgage.
A and N Mortgage Can Help
In the end, the best course of action when pursuing a divorce is to contact both your lawyer and your mortgage provider to make certain that the home is refinanced correctly. At A and N Mortgage, we’ll be happy to work with you to refinance your mortgage so that each party leaves the table satisfied.