Avoiding Foreclosure in a Divorce
Avoiding Foreclosure in a Divorce, a tough subject, though it should be addressed. If you find yourself facing divorce, you may have questions about your current mortgage. Specifically as to who is responsibly for the mortgage, liable for the debt after the divorce. As well as how to avoid foreclosure.
The first thing that a divorce couple must figure out is who is responsible for the mortgage debt. In many cases, when married couples first take out a mortgage, they obtain the loan and take title to the property jointly. Sometimes, only one spouse may take out the mortgage and sign the promissory note.
Signing a mortgage and promissory note has important legal and financial ramifications. The note creates the promise to pay. Whereas the mortgage creates the lien on the property. I f both spouses sign the mortgage and the promissory note, they are jointly responsibly for repaying the debt and will both be liable for the deficiency judgement following a foreclosure.
Should only one spouse sign the mortgage and promissory note, then that spouse is solely responsible for paying the debt and is the only person the lender will pursue for the any deficiency after a foreclosure.
If One Spouse Wants to Keep The Home
The next thing a divorcing couple should consider is who, if anyone, wants to keep and remain in the home and make the monthly mortgage payments. Most times, neither will do so. Once you determine which spouse wants to live in the home and remain responsible for the mortgage payments, he or she can:
- assume the loan or
- refinance the loan into his/her name only
Mortgage assumption, if one spouse wants to keep the house, that spouse can assume the mortgage and take over responsibility for the loan. Though he or she will have to obtain lender approval showing sufficient income to make the payments.
Due on sale clause does not apply to divorces. I f a mortgage contains a due on sale clause, then the mortgage generally cannot be assumed. A due on sale clause states that if the property is sold or conveyed, then the entire loan balance will be accelerated and the entire balance of the loan must be repaid. And yes, most mortgage contain a due on sale clause.
Refinancing the Mortgage
If one spouse wants to keep the property, another option is for that spouse to refinance the property in his or her sole name to release the co-borrower from the debt. In many cases, the divorce will require one spouse to refinance if he or she wants to keep the property. In doing so, the former spouse is released from the responsibility of making future payments. The spouse who remains in the home must rely on his or her own credit and finances to obtain the new loan.
Post-Divorce Foreclosure, is if a loan was originally taken out by both spouses and the spouse who retains sole ownership of the marital home stops making payments after the divorce, but never took necessary steps to assume or refinance the loan, the other former spouse is still responsible for repayment. The lender may then initiate a foreclosure, which will damage both spouses’ credit scores and could lead to a joint deficiency judgement.
Avoiding Foreclosure in a Divorce
If neither of the spouses wants to keep the home any longer, there area number of options available to avoid foreclosure such as:
- selling the property to pay off the debt
- renting out the property and applying the rental income to the monthly mortgage payments
- arranging a short sale with the lender ( when you make a deal with the bank to sell the home for less than you owe)
- completing a deed in lieu of foreclosure (when a lender agrees to accept a deed to the property instead of foreclosing in order to obtain title)
These are just some of the things that a foreclosure and divorce can present and should be considered.