The Divorce Ends, Yet the Mortgage Continues

One of the biggest issues remaining after a divorce is the mortgage. The typical scenario is that the husband and wife jointly own a residence. As part of the divorce settlement, either the husband or wife will keep the house and buy out the other’s interest through a division of other assets. The spouse keeping the house is often referred to as the “in spouse.”  The result is that the spouse who is bought out (often called the “out spouse”) is no longer an owner of the residence, yet remains liable on the mortgage obligation.

Equal Division

Finalizing the status of the house occurs in settlement or after a judge decides the matter.  In settlement, parties can reach any agreement they choose, if done voluntarily.  If the case is litigated and the decision is made by a judge, the judge has limitations on what can be done.  One such limitation in California is that the judge must make an equal division of the two spouses’ community assets and liabilities.

“Out Spouse”

It is appropriate for the “out spouse” to argue that being left potentially liable for the mortgage without ownership in the house is not an equal division of the liability.  If the judge agrees, then the “out spouse” may be successful in getting an order for the house to be refinanced or sold, either of which will remove the “out spouse” from the mortgage.  The “out spouse” should request this same type of order even if the case is settled without a judge. This is important because it removes potential financial liability for the mortgage.  It also improves the ability of the “out spouse” to purchase a home in the future, because a lender is otherwise unlikely to make, in essence, a second mortgage loan to the “out spouse.”

“In Spouse”

However, the “in spouse” may resist a sale or refinancing, by arguing that the legal requirement for an equal division has been met.  This is because the “in spouse” has assumed the responsibility for the mortgage in the property settlement (or court ordered division of assets and liabilities). The thrust of this argument is that the court should not be concerned about the “out spouse’s” credit score, potential financial liability or potential future inability to purchase a home.

Strong Guidance

This is a real problem which is not easily solved.  The credit score of the “out spouse” can usually be protected from destruction in the event the “in spouse” misses a mortgage payment. A good lawyer will make sure this is done. The unsolvable problem is the “out spouse’s” emotional worry that the “in spouse” might default and/or that the credit liability of the old mortgage will likely prevent getting a loan for a new home. In the past, when refinancing was readily available, this issue was not as problematic. This is not the case any longer. Parties in divorce have to make some very difficult decisions and compromises when it comes to the family residence. Both parties need strong guidance from their respective lawyers and financial professionals to make a decision which is best for each person’s financial future. Emotional decisions should never be made when divorcing, especially when it comes to a major investment like the house.