Breaking Up The Mortgage During an Illinois Divorce
DuPage County Divorce Lawyers
Your home is likely your most valuable asset, or your greatest liability if you are still paying it off like most people . If you are married, it is likely that you entered into the mortgage on the home jointly. If you are going through a divorce, you need to understand the ways in which having an outstanding mortgage can affect your financial health, including your ability to get another mortgage on your own in the future without your spouse’s name attached to it. There are numerous approaches to settling the matter of the marital home mortgage during a divorce, each with its own pros and cons, and dependent on the couple’s unique set of circumstances.
Defining the Marital Home
Virtually anything acquired during the course of a marriage becomes marital property, which is property that both spouses have a right to receive a portion of as a result of their divorce. Property may be marital even if an asset is only held in the name of one of the two individuals. Usually, the home will be in both spouse’s names, especially if both incomes were needed to qualify for mortgage. When two names are on a mortgage, both parties are responsible for paying the mortgage. Likewise, if one of the two parties defaults, the other party will generally become responsible for the entire payment. The lender can collect from any party whose name is on the mortgage regardless of what may be stated in a settlement agreement. If the home is marital property it is a shared asset between the parties that must be divided at the time of the divorce. The mortgage is a shared debt between the parties which also must be divided at the time of the divorce.
Options for Outstanding Mortgages During a Divorce
The simplest way to release a married couple’s outstanding mortgage liability is to sell their property. By selling the home, the income earned from the sale will be used to pay off the existing mortgage and then and funds remaining can be divided between the parties. With the release of the mortgage debt, the parties are free to move forward and take out a new mortgage as individuals or in the future with new spouses.
Selling the property is not always feasible. This is especially true when the home was recently purchased, the assessed value has gone down, or if the house is no longer worth even the amount of the outstanding mortgage. The market might not be good, or dealing with selling property with all of the other things going on during a divorce might not be appealing. Further, many married couples have children who want to stay in their home, schools, and neighborhoods. Regardless of the reason, most couples will choose to explore options other than selling the property.
Some couples may be able to amicably resolve their differences by having one spouse continue paying his or her share of the mortgage until it is paid off or a reasonable sale price is reached. Beware, however, that if both names remain unchanged on the mortgage, you can become individually liable if your ex-spouse falls behind or stops paying on time. This is a risky decision, even when there is some trust maintained between the spouses.
Deed Transfer or Buy Out
One party may “buy out” the other party’s share of the home upon agreement. This resolution allows one person to stay in the marital home without the concerns that the other party will not contribute to paying the mortgage. This option actually affects the legal title and deed of the house, and effectively removes one party from the property. Beware: this buy out does not affect the existence of the mortgage. Any outstanding mortgage obligations are still completely intact and can be released only by agreement with your mortgage lender. If the lender agrees to release one of the parties from the mortgage upon agreement, there may be fees associated, and like our next option, refinancing, this option may require one party to have a sufficient credit score and income to be able to be individually named on the loan.
Refinancing is a more attractive option for couples who are able to amicably decide who should keep the marital home. While the person who keeps the home will be required to equitably compensate the other spouse for the value of the home, the person who maintains the home will be the sole mortgagee. This will prevent the mortgage lender from collecting against you if your ex-spouse defaults on the loan after it is refinanced and your name is removed.
Refinancing, however, can sometimes be difficult. Individuals may not qualify for a refinanced loan by relying solely on their own income depending upon their credit score, as well as other assets and debts in their name. There are also fees and sometimes penalties associated with refinancing a mortgage. Despite the fees, refinancing your loan is one of the best ways to ensure your name is off of the mortgage contract if you are the spouse leaving the marital residence. If the spouse remaining in the residence, who is responsible for paying the mortgage, defaults on a payment, you are protected from collection of that debt by the lender because your name and therefore your liability to the lender was removed.