For many divorcing couples, their house is the most valuable asset—and usually carries the largest debt: the mortgage.
The divorce decree entered by the court typically divides a divorcing couple’s property, including the family home. But a divorce decree is not binding on a mortgage company. Texas courts don’t have the power to order a lender to release one spouse from a mortgage even when that spouse is not awarded the house and the mortgage debt, and no longer lives there.
In other words, a mortgage lender retains its right to hold both spouses liable for a mortgage debt when both of their names are on the mortgage—even if the divorce decree requires only the spouse who is awarded the house to pay the debt.
This situation clearly carries significant financial risk. For example, the spouse awarded the house may make payments late or not at all, resulting in foreclosure—which will negatively impact both spouses’ credit reports. The spouse not awarded the house also must make sure to carry insurance covering any liabilities pertaining to the house, such as a personal injury, while he or she is still listed as an owner on the mortgage.
So, what’s the solution? Selling the house, paying off the mortgage, and splitting the proceeds is always the best financial route. But that’s not always practical. There are other alternatives, but none are easy.
For example, the spouse awarded the house could refinance the mortgage in his or her own name. But that’s not always possible as he or she may not be strong enough financially to carry the mortgage alone. Plus, a refinance can cost several thousands of dollars and it may not be an option if the mortgage is greater than the market value of the house. Nor can a court order a party to refinance a house, and an agreement between the parties to do so is generally not enforceable.
Another option is to request a loan assumption where the spouse awarded the house takes full responsibility for the mortgage and the other spouse is removed from the note. If possible, the removed spouse should obtain a release of liability protecting him or her from missed payments, foreclosure and other liabilities. But there is little incentive for a mortgage company to let one payment source off the hook, nor are lenders required by law to do so.
At a minimum, the spouse awarded the house and mortgage debt should execute a Deed of Trust to Secure Assumption in favor of the other spouse and record it in the real property records of the county in which the house is located. A Deed of Trust to Secure Assumption will allow the spouse not awarded the house to take it over in the event of default, rather than the house going into foreclosure with the corresponding negative consequences.
Although difficult, taking your name off the mortgage during a divorce is not impossible. But you need the right lawyer to make it happen. Sonya B. Coffman, a Southeast Texas Board Certified divorce lawyer and CPA, is that lawyer.