The phrase, “’til death do us part” is one we’ve all heard. Unfortunately, many marriages don’t last that long. When a couple decides to separate, either legally or informally, there are different options to consider. Do they simply need some time apart to figure things out independently? Maybe have a little “breather” in order to think things through more clearly? Whatever the decision, there are many things to consider, especially when it comes to your finances and your mortgage. A marital separation can be an informal agreement, or it can be a legal separation. As it relates to a mortgage, what are the differences, between an informal separation and a legal separation agreement?
Lenders and Legal Separation
Before we get too further, note this information is not to be construed as legal advice, but information on how lenders view marriage, divorce and legal separation. Different states can have different laws regarding the distribution of assets when a couple decide to divorce or separate. In the situation of a divorce, the divorce decree will spell out who is responsible for the mortgage payment. The decree will award the property to one party while also dictating who is responsible for the mortgage payment. Sometimes the occupying spouse is responsible for the mortgage payment while other situations has one party occupying the home and the other making the mortgage payments.
When the occupying spouse also takes responsibility for the mortgage payment, in order to get the other spouse off of the title, a complete refinance will be necessary. This also means the occupying spouse must qualify on his or her own. If the non-occupying spouse is responsible for the mortgage payment, that individual will still have that debt appear on a credit report, affecting the ability to qualify for another mortgage. Note, just because the divorce decree states who is responsible for the payment, that doesn’t necessarily equate to the lender agreeing to the situation. The mortgage was approved with two incomes in the beginning and now things are different.
Okay, but let’s circle back. What if the couple isn’t sure they want a permanent split but do want some time away from one another? This is a common scenario. They’re not divorced but living separately. A marital separation means they’re not physically living together but still married. A separation agreement can spell out who is responsible for certain debts and other obligations.
An informal agreement carries little to no relevance in the lender’s eyes. Both are one the note and both are going to stay on the note until the mortgage is retired via the sale of the home or the existing mortgage refinanced, removing the non-occupying spouse from the title while quit-claiming the interest of the non-occupying spouse.
Formal Legal Separation Agreement
A formal agreement is sometimes called a legal separation. It’s a legal document drawn up by an attorney and approved by a judge. This carries legal weight that an informal, verbal agreement does not. A legal separation has a formal agreement that spells out what a divorce decree might list concerning assets and liabilities. The agreement can identify which party will occupy the property and which party will be responsible for the mortgage. Sometimes it’s the same individual and other times it’s not. Or, one party might be responsible for the mortgage while the other is responsible for property taxes, insurance and utilities. There are endless combinations of asset distribution, but everything is spelled out in the legal separation agreement.
A lender might recognize the legal separation but won’t release the non-occupying spouse from liability until the occupying spouse has demonstrated a timely payment history, say twelve months or so. At the end of the “trial” payment period, the other spouse can then file to have his or her name removed from the obligation. Again, this is important because this can hurt eligibility to qualify for a new mortgage to buy a home while also being obligated to pay the mortgage for the old home. If things don’t work out, getting one party off the mortgage legally is a process, not just a marital arrangement.