Mortgages are already complicated enough, but when you and your spouse cosign for one and then decide to go your separate ways it can get really messy. Even when the divorce is relatively amicable and cooperative, dividing up a house that has not yet been paid off can be challenging.
It gets much worse in cases where a couple is going through a complicated divorce. Managing a mortgage under those circumstances can seem impossible. There are some solutions, however, and they may be invaluable to you if you find yourself in this unfortunate situation.
Let’s say, for example, that you and your spouse decide that one of you will keep the house and be responsible for paying off the note. The other will legally relinquish any ownership rights, but will not have to contribute to the mortgage payments. That may seem fine, but what happens when the person who kept the house makes a late payment? The bank will report that to the credit bureaus for both of you, since both names are still on the loan commitment. If the person who kept the house completely defaults and the house goes into foreclosure, that too will show up on both credit reports. The spouse who has no ownership interest in the home may wind up with ruined credit and may even be liable for such things as back taxes or contractor liens that go unpaid. That could possibly trigger bankruptcy.
Removing Your Name from the Mortgage
The lesson here is clear and simple; if you get divorced and agree to give your spouse the house, make sure that your name is taken off the mortgage during your legal divorce settlement. An issue with that solution is id doesn’t always work. You have to make a request to the lender and they tend to not permit those kinds of requests because they want to keep both of you on the hook in case one of you defaults.
Having a second mortgage on the home further complicates things because even if the lender on the first mortgage agrees to remove your name, the second mortgage holder may not. These days, in the wake of the foreclosure crisis, the chances are slim to nil that you can merely ask for your name to be taken off the note in order to protect your credit.
The Refinance Option
Another tactic is to refinance into a new mortgage. While doing so, you pay off the existing loan and then you make sure that there is only one person involved in the new note. If only one of you is going to be responsible for the refinance, however, that person will need great credit, a hefty down payment, and proof that they have enough income to qualify by themselves for the refinance.
Refinancing is a beautiful way to resolve the mortgage problem during a divorce, but it is usually easier said than done. Not only are banks hesitant to refinance because home values have fallen, but their loan underwriting guidelines are strict and not everyone has the financial strength and credit needed to be eligible. In fact, if you cosigned the mortgage in the first place it was probably because you needed to combine your income with your spouse’s in order to get approved. You will probably not be able to refinance the first one unless the holder of that second mortgage signs off on the deal. That’s a sticky situation to be in.
Selling May Be Your Best Bet
Although it can be a hard pill to swallow, selling may be the right thing to do to ensure that you do not have any credit issues in the future. Your ex may not want to the sell house because it holds emotional value for them and relocating is a hassle.
Your best bet is to have them buy you out, if that’s an option. Have them take out a new mortgage, pay off the old loan and reimburse you for your share of the house –otherwise listing with a Realtor and selling in the open market may be your only option. At least then you can move on without being tethered to the debts of your ex and without the worry of future ramifications to your credit.
Tom Kerr writes for CompareCards.com in addition to others. He has been an avid writer for years, even winning awards for work he’s done.