I Want to Keep the House, But the Mortgage is in Both of Our Names. What Are My Options?

By Matthew T. Hovey, Esquire

Most of the clients I meet with are home-owners. In this post-real estate bubble period, almost all of the homes are mortgaged to a bank. In these situations, the first two questions I will ask of the client are (1) who has an ownership interest in the home (who is on the deed?); and (2) who has a liability interest in the home (who is on the mortgage?). While the answer to these questions do not affect whether the property is marital property (see blog article on this topic), it does affect our options regarding how the house may be handled during property distribution. The focus of this article is on a situation where both spouses are on the deed and the mortgage.

A common scenario is as follows: A spouse comes in for initial consultation. He and his spouse are proceeding amicably and have had lengthy conversations on how to divide the property. They have a house and both parties on both the deed and the mortgage. At the time of the consultation, there is still approximately 16 years left on the mortgage before the lien is satisfied. Husband and Wife have three kids and have lived in the home for years with the kids. The spouses decide that Wife will keep the home and be able to live there with the children so that the divorce disrupts the children as little as possible. Now that the parties have an agreement, Husband wants to know how they make the agreement a reality.

The answer is not easy. Switching ownership of the property via the deed is simple enough, but the complications arise when you consider the mortgage. The mortgage is a debt owed by the parties who entered into the mortgage to the lender, typically a bank. As a result, the bank’s interest must always be taken into consideration. Ultimately, if the bank’s interests cannot be satisfied, the parties may be forced to sell the property, rather than transfer it as they had initially agreed.

The obvious question then is what are the options? You should consult with an attorney to address the unique aspects of your situation, but here are some examples:

(a) The best solution is for the spouse remaining in the home to immediately satisfy the mortgage. Then the deed to the home can be transferred solely to that spouse.

(b) The most common solution is to transfer the deed to one spouse and also have that spouse refinance the mortgage solely in his or her name. Especially in the wake of the burst housing bubble, however, it can be extremely difficult for a spouse to solely qualify for financing on a house which originally required two people assume the obligation. As a result, other options often need to be considered.

(c) Transfer the deed to one spouse (either immediately or after the mortgage is satisfied), but not the mortgage. The parties should execute an agreement whereby the receiving spouse indemnifies the other spouse against any liability associated with the property and the mortgage. Indemnification means that the spouse remaining the home will protect the other from any liability. How this works in reality, however, is that the bank or third-party will obtain a judgment against both parties, but then the remaining spouse will cover the other spouses losses. The disadvantage, however, is that indemnification is only as good as the remaining spouses financial ability to cover the losses.

(d) Often, even though the parties are in agreement about what to do with the house, the economic and legal reality of the situation prevent the parties from realizing their agreement. In a situation where the parties cannot adequately protect themselves, the only option that remains is the sale of the home. The parties will then be required to satisfy the mortgage. If they are lucky, some equity will leftover and it can be used by the parties as they transition into the next chapter of their lives.

If you find yourself in a similar situation, then I strongly recommend that you consult with an attorney. Here at Prince Law Offices, P.C., we would be more than happy to help you assess your options and recommend a plan of action. We love to hear from our readers, so if you have questions or comments, please leave them below!

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