Dissolving a Joint Mortgage During Divorce

If you have purchased a house with your spouse and are considering separation or divorce, there are steps you can take to protect your mortgage liability and credit. If both you and your spouse signed for your current mortgage, both of you are liable for making the mortgage payments. 

Failing to make the mortgage payments on time will have a severe impact on your credit rating and ability to obtain credit or mortgage financing in the future. 

In addition to a joint mortgage, the assignment of responsibility for marital debt as well as any child or spousal support will impact your ability to qualify.

How to dissolve a joint mortgage

1. Consider your best option for moving forward.

In the case of divorce, there are two main options to dissolve a joint mortgage:

• Sell the property and pay off the mortgage.
• Obtain court approval for the assignment of the mortgage to one of the spouses.

A warning about option two: assigning the mortgage and ownership of the property to one of the spouses may lead to severe credit issues in the future if they fail to make timely payments. 

The spouse assigned ownership of the house and responsibility for the mortgage should be required to refinance the mortgage into their name only.

The other spouse will likely be necessary to sign a quitclaim for the deed to be relinquished to the spouse retaining the property. Keep in mind that a quitclaim deed does not release liability. It only removes one spouse from their status as a property owner.

2. Provide separation agreement and divorce decree.

Lenders require and review separation agreements and divorce decrees to clarify which party is financially responsible for marital debts including:

• Credit cards
• Installment loans
• Auto loans
• Student loans

Lenders will often omit the payment history on debts that were assigned to the other spouse. Also, the division of assets is well defined and may include:

• Real property (housing, vacant land, and automobiles)
• Bank accounts
• Retirement accounts

The obligations or additional income resulting from the divorce are typically disclosed in the separation agreement. These requirements and other incomes may include but are not limited to child and spousal support.

 Some mortgage types allow one party to assume the mortgage, thereby releasing the liability of the other spouse (FHA financing). Conventional financing typically does not allow for assumptions.

3. Understand the nitty-gritty of debt assignment.

Wading through the details can be difficult, but your lender or attorney can help you through. While you don't need to understand the protocol like a mortgage professional, it helps to review and process the terms according to your loan provider to ensure you're not in the dark. 

Below are the guidelines for conventional and FHA mortgage financing in regards to court ordered assignment of a joint mortgage or debt. Included in each guideline are explanations in more understandable terms. 

Conventional Mortgage

Court ordered assignment of debt according to Fannie Mae:  

“When a borrower has outstanding debt that was assigned to another party by court order (such as a divorce decree or separation agreement) and the creditor does not release the borrower from liability, the borrower has contingent liability. The lender is not required to count this contingent liability as part of the borrowers recurring monthly debt obligations. The lender is not required to evaluate the payment history for the assigned debt after the effective date of the assignment. The lender cannot disregard the borrower’s payment history for the debt before its assignment.”

What this means:

For a conventional mortgage, the lender is not required to count contingent liability as part of the borrower’s monthly obligations. A contingent liability is the result of a court order assigning the responsibility of debt to a person different than the borrower. This is typically found in a separation or divorce decree. 

FHA Mortgage

Exemption from contingent liability policy on mortgage assumptions according to HUD:

“A contingent liability exists when an individual will be held responsible for payment of debt, should another party, jointly or severally obligated, default on that payment. Unless the borrower can provide conclusive evidence from the debt holder that there is no possibility the debt holder will pursue debt collection against him or she should the other party default, the following rules apply to contingent liabilities:

1. Mortgage Assumptions. When a borrower remains obligated on an outstanding FHA-insured, VA-guaranteed, or conventional mortgage secured by a property that has been sold or traded within the last twelve months without a release of liability, or is to be sold on assumption without a release of liability being obtained, contingent liability must be considered unless:

a. The originating lender of the mortgage being underwritten obtains from the servicer of the assumed loan a payment history showing that mortgage has been current during the previous 12 months; or

b. An appraisal or closing statement from the sale of the property supports a value that results in a 75 percent LTV ratio [i.e., the outstanding balance on the mortgage loan (minus any UFMIP, if applicable) cannot exceed 75 percent of the appraised value or sales price].

2. Co-Signed Obligations. If the individual applying for an FHA-insured mortgage is a co-signer-or is otherwise co-obligated on a car loan, student loan, mortgage, or any other obligation - contingent liability applies unless the lender obtains documented proof that the primary obligor has been making payments during the previous 12 months on a regular basis and does not have a history of delinquent payments on the loan. “

What this means:

Contingent liability is the result of a court order assigning the responsibility of debt to a person different than the borrower. This is typically found in a separation or divorce decree. Although, the debtor could pursue the borrower for payment of the debt if the court order assigned party defaults on the debt. Unless the borrower can provide proof that the debtor has completely eliminated any possible liability for the repayment of the debt the following rules apply for contingent liabilities.

1. Mortgage assumptions without a release of liability being obtained, contingent liability must be considered unless the following conditions apply:

a. Documented payment history showing that the mortgage has been current over the most recent 12 month period.

b. Documented evidence (an appraisal) that the property has a minimum of 25% equity.

2. Documented evidence that the primary obligor on a co-signed debt has made the last 12 monthly payments on time.  

Michael Zuren, PhD

I have 25 years experience in the mortgage banking industry. My experience includes the following loan types: (1) HomePath, (2) OHFA, (3) FHA 203k, (4) VA, and (5) USDA financing. I have been serving Cuyahoga, Lake, Geauga, and Ashtabula counties in Northern Ohio... more