Many married couples own a house together, and it is common to have a joint mortgage that both spouses have applied for together. Unfortunately, this can create a problem when the couple divorces, especially if one of the spouses is considering keeping the house.
Here’s what the problem is – and the best course of action to fix it.
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The problem with a joint mortgage in divorce
If a couple divorce and share a house, they will have to decide what to do with it. If they sell it, they won’t have to worry about their joint mortgage. They can repay the loan with the proceeds from the sale of the house and divide the remaining money between the two of them as part of their divorce settlement agreement.
But if one of the spouses keeps the house and there is a joint mortgage, problems can arise. See, the divorce decree can specify who is responsible for paying off the home loan. But, in the eyes of the law and in the eyes of the lender, the two the spouses have taken out the loan, so they are both equally responsible for its repayment.
Now, for example, let’s say your spouse keeps the house and the divorce agreement says he has to make the remaining mortgage payments. Despite this, the mortgage will remain on your credit history. This could be a problem if you want to buy another house or take out other types of loans, as the mortgage payment will factor into your debt ratio.
And that’s not even the biggest potential problem you’d have to face. If your spouse stopped making payments, the mortgage lender would still consider you legally responsible. The late payment statement could appear on your credit report, and if your spouse defaults and the house is foreclosed, it will appear on your credit report. Late payments and foreclosure can have a devastating impact on your credit score and your future ability to borrow.
If the state where the mortgage is located allows lenders to collect any outstanding balances, you can too incur costs if the home does not sell enough to pay the lender in full after foreclosure. The lender could try to collect the difference, which means your assets could be at risk.
While you could go back to court to try to enforce your settlement and get money from your spouse to settle the non-payment, that would not erase the negative consequences associated with damaged credit. And if your spouse couldn’t find the money, you would be out of luck because you would have no way to collect.
The best way forward
Ultimately, the best and only way to avoid these inconveniences is for the spouse responsible for the mortgage payments to refinance on their behalf only. If they get a new mortgage refinance loan in their name only, it can be used to pay off your joint loan. You will no longer have the legal responsibility for the mortgage and will be able to move on with your life without worrying about the outstanding balance on your mortgage that will come back to haunt you.