Continued from “D-I-V-O-R-C-E and Real Estate, Part 4”.
Previous segments of this blog have discussed the necessity of divorcing spouses doing sufficient Due Diligence regarding the real value, the current condition and the known and unknown risks of jointly owned real estate.
I’ve saved the biggest bombshell for last. Real estate practitioners are too well acquainted with this “problem”, because we deal with the repercussions every day. It’s the MORTGAGE HANGOVER.
Sadly, divorcing spouses actually believe their divorce decree.
- The in-spouse believes that the out-spouse is going to make the mortgage payments until the kids graduate from school because the decree says so. But he/she stops making the payments, the house heads to foreclosure, the in-spouse files bankruptcy to slow down the foreclosure but it eventually happens anyway. Credit destroyed, home lost, family potentially out on the street.
- The out-spouse signs a Quit Claim Deed and believes that the in-spouse now completely owns the home (true) and will pay off the mortgage. But the in-spouse doesn’t keep up with the payments. The mortgage company comes after the out-spouse for the payments (regardless of what the divorce decree says) and may even eventually foreclose on the property. Credit ruined for years and/or major financial hit.
- The in-spouse believes that the HELOC (Home Equity Line Of Credit) opened before the divorce is no longer open for the out-spouse to use or vice-versa. But it is still open and the ex-spouse runs it up to the max. The in-spouse now must repay this or face potentially losing the home. Financial setback, possible financial ruin leading to foreclosure.
Is your head spinning yet?
I suggest mortgage counseling!
EARTH TO IN-SPOUSE AND OUT-SPOUSE: Any current mortgage lender(s) don’t care one iota what the divorce decree says. If both spouses were on the mortgage(s), both spouses are forever jointly and severally responsible for the mortgage(s). This means that the out-spouse is just as responsible for the entire amount owed on any mortgage(s) as the in-spouse, even though the out-spouse may have signed a Quit Claim Deed granting his/her entire interest in the property to the in-spouse. So, if the in-spouse loses his/her job, becomes ill or for any reason defaults on the mortgage payments, the lender looks to the out-spouse for the payments… even if the spouses were divorced 10 years ago and the decree specified that the in-spouse would pay the mortgage.
AND IT GETS WORSE: Any NEW mortgage lender for the out-spouse’s next home also doesn’t care one iota what the divorce decree says. The out-spouse signed a Quit Claim Deed and believed he/she was done dealing with the former marital home? Until and unless the ex-spouse refinances the home in his/her own name, both spouses are (unfortunately and unexpectedly) still on the hook. The mortgage debt for the former marital home will be counted when trying to qualify for any future mortgage.
The same is true for any HELOC’s left open after the divorce.
Wow. It’s easier to divorce the spouse than the house! Just because there has been a legal divorce does not mean there has been a financial divorce.
What can divorcing spouses do to become legally and financially divorced as far as the marital home and other jointly owned real estate is concerned? It’s best to have one spouse completely (re)finance the property in their own name. If that’s not possible due to credit issues, income issues or appraisal issues, the spouses may be well advised to SELL the property, even if it means doing a Short Sale. If one can’t completely buy the home, both may be better to sell it than risk the financial ties which will remain.
To be continued! In the final part of this blog, I’ll present some resources divorcing spouses can use to protect themselves, their children and their futures.