No one ever gets married with the intention of getting a divorce. And no lender makes a loan with the intention of foreclosing on the property. But when a couple who have financed a home together decide the best thing to do is end the marriage and go on their separate ways, figuring out what to do with the home they own together. There are some serious financial implications when a divorce in on the horizon and how the home and the mortgage is handled is extremely important. If you’re in this situation or know someone who is and is a bit overwhelmed right now, here is how lenders view mortgages when couples decide to split.
A Common Scenario
Let’s say the couple decides to get divorced and files the necessary paperwork. A divorce will typically take some time to be adjudicated and the marriage is officially over. Maybe the couple instead decides to separate for a while to see if things will work out before taking the final step. Consider that one spouse remains in the property and the other finds another place to live. They separate. But there is a formal separation where attorneys are involved and an informal one where one of them moves out and the other stays without any recorded agreement.
After a few months, the person who moved out decides to buy a home and finance the purchase with a mortgage. An application is made and reviewed and after a couple of days is told the application is turned down. The borrower is confused. There have never been any late payments on anything and the accompanying credit scores are through the roof. But the declination notice is not based upon credit but on debt ratios. This also confuses the borrower. There really isn’t any major debt. The spouse who remained in the property is making the mortgage payments and can prove it.
Understanding Ownership in a Divorce
The problem here is there is no formal separation agreement that spells out who is responsible for what. One of the individuals simply moved away. When there is a mortgage payment involved, both of them signed the note. Nothing in the note talks about what might happen in case the marriage fails. It does talk about who is responsible for payment…both of them are obligated, regardless of any marriage troubles. Another issue here, even in the instance of a separation agreement, is a payment history.
Let’s say the divorce is final and one keeps the house and one doesn’t. The occupant agrees to make the mortgage payments. If it is a recent divorce or a recent legal separation, such as a few months, any new mortgage to buy another property will require there be evidence that the person keeping the original property has been making the payments on his or her own for the last 12 months.
With a divorce when one keeps the property and the other does not, it needs to be specifically spelled out in the divorce decree. Applying for a future mortgage will mean providing a copy of the divorce decree along with other standard documentation.
But let’s circle back now about two people on the same note but now they’re no longer married. Does that remove one of the parties from the responsibility of paying the note? No, it does not. The only way to get one person off the note entirely and legally is with a refinance. A refinance is in fact a brand new mortgage and the person applying for the refinance to get a new loan and get the “ex” off title. That is of course if the ex agrees to come off the note in the first place. Maybe the ex wants some cash out of the deal. After all, they bought the home together for $200,000 and now the home is easily worth $250,000. Would the ex simply agree to walk away from his or her share of the additional $50,000 in equity? Probably not. A divorce involves not just the note but also title issues. Further, if the occupying spouse makes a late payment and there is no refinance it will show up on the other’s credit report. Most often without the other party knowing about it.
If you’re going to apply for a mortgage and are in this situation, make sure to get your paperwork in order. Beyond the standard request for documentation lenders make, you’ll need your divorce decree which states who gets the home and who is responsible for making the mortgage payment. Have a little patience because there will be more loan processing involved. You’ll get where you need to be, just prepare a little more upfront.