Many couples buy their family home as a joint venture. They both sign the promissory note and the mortgage, which means they are both responsible for paying the mortgage and the home is used as collateral. They both usually sign the deed as well, which makes them both owners of the property. This common arrangement is great for married couples, but it can trigger a series of problems for couples in the process of getting divorce.
Most mortgages have a due-on-sale clause that states that the mortgage must be paid in full before the property can change owners. When one spouse decides to stay in the family home after divorce, this is considered a transfer of ownership. There was a time when mortgage companies would force the two spouses to pay the loan in full before allowing the transfer of ownership after a divorce. But the federal Garn-St. Germain Act prevented lenders from enforcing the due-on-sale clause in the case of divorce.
While some states do abide by the Garn-St. Germain Act, lenders will often take their chances and ignore it. It is common for lenders to force divorced couples to pay off the mortgage before transferring it to one spouse, or the property will be foreclosed. This is why both parties in a divorce need a good lawyer to help take on the lender in the property is to be transferred.
Many lenders will tell you that a divorce decree does not remove someone from a mortgage. The cleanest way to avoid foreclosure after divorce is for the spouse who is going to live in the family home to refinance the mortgage in their name. As long as the spouse has an adequate credit score, most lenders will allow this to happen.
One element of property ownership that gets lost in the discussion of divorce and foreclosure is the quitclaim deed. The spouse who is assuming ownership of the property should also insist that the other spouse sign a quitclaim deed. This means that the property and the home will all be in one name.
If both spouses are registered owners of the property and responsible for the mortgage, then sometimes it can be a lack of understanding of how lending works that leads to foreclosure. Just because the property was given to one of the spouses in the divorce decree does not mean that the lender will automatically transfer the mortgage to that spouse.
If neither spouse pays the mortgage after divorce, then the lender will start foreclosure proceedings on both spouses. If the spouse who lives in the home goes bankrupt, then the remaining spouse will still be put through foreclosure, even though the divorce decree gave the house to the other spouse.
Divorce and mortgages are often a tricky and confusing combination. In the end, the lender simply wants someone to pay the mortgage. If one spouse is awarded ownership of the property, then that spouse should refinance the property in their name. A divorced couple should never assume that the wording in a divorce decree is going to be enough to prevent the martial home from going into foreclosure.