When spouses divorce, they must divide their real estate. This is most often accomplished by using a quitclaim deed to remove an ex-spouse from the deed to the property.
While signing a quitclaim deed may release your interest in the property to your ex-spouse, it does not release you from your mortgage. The property is still secured and the bank may foreclose on it if your ex-spouse defaults on the mortgage. This can have disastrous effects on your finances:
- Your credit score can be affected by your spouse’s default on the loan; and
- If the amount that the property is sold for in foreclosure is less than the amount owed to the bank, the bank may look to you for the difference—even though you no longer own the property!
This article discusses how to protect yourself when dividing mortgaged property on divorce. For information about how to divide real estate on divorce, see How to Remove an Ex-Spouse from a Deed.
The Problem: Mismatch Between Ownership and Mortgage Liability
When couples purchase property, they usually finance it with a bank. The bank loan is secured by the property. In some states, the document that secures the property is called a mortgage. In others, it is called a deed of trust.
A mortgage or deed of trust may not match the title to the property. This can occur, for example, when both spouses are originally included in the loan documents, but only one spouse receives the property in the divorce. In this scenario, one spouse will own the property, but both spouses could remain responsible for the loan.
When an ex-spouse no longer owns the property but is still listed on the mortgage, he or she is responsible for debt on the property that he or she doesn’t own. Failure to make payments could be reported to the credit bureaus and appear on that spouse’s credit report.
The Solution: Release or Refinance
When an ex-spouse is removed from the title to the property, he or she will usually also want to be removed from the loan. This protects the ex-spouse (and his or her credit) from responsibility if the former spouse does not make payments on time or if the mortgage is foreclosed. There are two ways to remove an ex-spouse from a loan: Release and refinance.
- A lender may release the ex-spouse from the loan. If presented with a divorce decree and a quitclaim deed, many lenders will remove the ex-spouse and leave the loan in the name of one spouse only. This is true even for loans underwritten by the Veteran’s Administration (VA loans) or other governmental organizations.
- Refinancing creates a fresh loan in the name of only one spouse. The prior loan is paid off as part of the refinancing. After the refinancing, the ex-spouse that is no longer listed on the property and is not responsible for past due mortgage payments, liens, or other property-related debt.
Issues sometimes arise when the release or refinancing is not done during the divorce. An uncooperative ex-spouse may try to require additional payment before cooperating in the transfer and/or release of the loan. Often, these unreasonable demands violate the divorce decree could create legal liability for the uncooperative spouse. In this scenario, the spouse seeking cooperation may seek to have the uncooperative spouse declared to be in contempt of court for ignoring the court order.
Frequently Asked Questions about Mortgages and Divorce
Many divorcees have questions about how to straighten out the mortgage after a divorce. The following is a list of frequently asked questions and answers.
What if I divorce and the mortgage is in my name only?
If you divorce and the mortgage is in your name only, a lot depends on whether you are keeping the property in the divorce. If so, just be sure to get a quitclaim deed transferring the property to you. After the quitclaim deed is filed, you will own the entire property and be responsible for the entire mortgage.
If the mortgage is in your name and you are not keeping the property (i.e., if your ex is getting the property in the divorce, then your ex must either refinance or assume the loan. You will want to be very careful to ensure this is done soon after the divorce. Without it, your ex could simply walk away from the property with no liability, leaving you to either pay the mortgage on property you do not own or suffer the consequences.
What if my name is on the deed but not on the mortgage and I divorce?
If you are the spouse keeping the property, your ex will probably require you to refinance the property or assume the mortgage. Otherwise, your ex is responsible for the mortgage even though you will own the property.
Does a quitclaim deed remove or release me from the mortgage or loan?
No. A quitclaim deed deals only with title to the property. Property ownership differs from lender liability. Property ownership is determined by the deed filed in the land records. Your liability to the lender is determined by your loan documents and your mortgage or deed of trust, which is also filed in the land records.
It is possible for you to be removed from the deed without being removed from the loan. This often happens with a divorcing couple signs a quitclaim deed without requiring, as a condition of the transfer, that the lender release the spouse that no longer owns the property. In this scenario, you could be responsible for debt on property you do not own. The lender could still sue you if your ex-spouse does not make payments on the loan.
What should I do to get removed from the loan to the property?
Obtain a release from the lender. Assuming your spouse is creditworthy and that you are not in default on the loan, most lenders will release you from the loan. Contact your lender to discover any specific requirements before you sign the quitclaim deed to the property. Also consult with your divorce attorney to be sure that your divorce decree and/or settlement agreement contains language that conditions your transfer of the real estate on your release from the loan documents.
What should I do if I have signed a deed but I am still on the loan documents?
First, contact your lender to find out if the lender will simply release you from the loan. Provide your lender with the final divorce decree and any related settlement agreement. Also provide the lender with a copy of the quitclaim deed that has already been signed and filed in the land records. With this information, the lender should release you from the loan.
If the lender is unwilling to release you, contact the divorce attorney that handled the divorce. Ask whether the divorce documents required a lender release as a condition to the property transfer. Also ask whether the divorce documents included an indemnity clause to protect you from obligations of your ex-spouse. If your ex-spouse has defaulted and his or her creditors are now looking to you, this indemnity clause could allow you to take legal action against your ex for breaching his or her obligations.
Do I need to refinance after a divorce?
Not usually. If you are creditworthy, the lender will often allow you to assume the loan and/or release your spouse from the loan. But if there are problems with either option, you may need to refinance to remove your ex-spouse from the mortgage.