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Divorced and Needing a Loan Modification: What to Do

Divorced and Needing a Loan Modification: What to Do

Divorced and Needing a Loan Modification: What to Do 150 150 The Law Office of Nadia K. Kilburn

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If you’re going through a divorce, chances are – everything seems stressful right now.

If you’re also missing mortgage payments due to the changes with the household income, it can be difficult to understand how your divorce will impact the mortgage.

You can’t rely on your mortgage servicer to hold your hand through the process and even the best of family law attorneys often don’t have the particular knowledge base to help guide you in the right direction once it becomes time to deal with the mortgage.

The first two things you need to figure out are:

1. Who are the borrowers on the loan?

Many people assume that both spouses are borrowers on the loan but you need to double-check this with your lender as soon as possible.

I can’t tell you how many people I speak to on a regular basis who can’t remember exactly what the situation was when the mortgage was taken out. Particularly, if one spouse was primarily responsible for handling the household finances, it may not be clear to both parties who is an actual borrower on the mortgage.

If there are two borrowers on the loan, both names will be listed on the mortgage statement.

But the safest way to find out who the borrowers are on the mortgage is to call your mortgage servicer and ask them to tell you

2. Who are the parties on Title?

Being “on Title” and being a borrower on the mortgage are two different things.

It is possible to be on Title but not be a borrower on the mortgage.

Being on Title means you have a say in how the property is transferred / dealt with but it does NOT mean that you have legal liability on the underlying mortgage. Being on or off Title does not automatically impact the legal liability related to the debt.

A common misperception is that by removing oneself from Title, you give up your obligation on the mortgage – this is not true. Unless you go through the assumption process (detailed below) or sell the property, you can’t alter your legal liability by adjusting Title.

Most commonly, married couples are both borrowers on the mortgage and on Title.

But, there are instances where only one spouse is a borrower but both spouses are on Title.

My divorce decree awarded me the property. Does that mean that my ex-spouse is immediately removed from the loan?

Unfortunately, the divorce decree doesn’t have any impact on the underlying mortgage. Losing rights to the property in a divorce or gaining rights to the property in the divorce does not automatically adjust the legal liability.

If you are awarded the home but not on the mortgage, you will need to go through an assumption (detailed below). If you were not awarded the home and were on the mortgage, you will need your ex-spouse to assume the loan and remove you from it.

How is a Quit Claim Deed used in a divorce proceeding?

A quit claim deed is a document that adjusts who is attached to the Title of the property.

Generally, a quit claim deed can add a person to the Title of the property and it can remove a person from the Title of the property.

In a divorce situation, it is common to have a quit claim deed executed once the divorce decree is in place. The quit claim deed gets executed in line with the divorce decree. It removes the spouse from Title who was not awarded the property in the divorce.

A quit claim deed is one of the required documents needed to adjust the legal liability on the underlying mortgage. To ensure there are no issues once you start working with your mortgage lender, it is best to have an attorney prepare and record the quit claim deed.

What is a mortgage assumption in a divorce proceeding

An “assumption” (with regards to a divorce situation) is the term your mortgage servicer uses to describe the process of:

    1. Removing a borrower’s legal liability on the mortgage should they not be awarded the property per the terms of the divorce decree.
    2. Adding the spouse who was not originally on the mortgage should they be awarded the property per the terms of the divorce decree.

Is the loan assumption process difficult during a divorce?

If you have not missed any payments on your mortgage during your divorce, the assumption process is relatively straightforward.

If the loan is current, send your lender a copy of your divorce decree and your quit claim deed. They will send these documents to the underwriting team who will issue the appropriate documents in line with the divorce decree.

If the loan is current and you’re trying to switch from one borrower to another borrower, your mortgage lender has the right to request financial information from the borrower who is trying to take over the loan.

The borrower looking to assume the loan could be required to provide income information (pay stubs / proof of employment etc.) in addition to the divorce decree and quit claim deed in order to show their mortgage servicer that they can afford the mortgage payments moving forward.

Lenders do not want to remove a borrower who has capacity to pay the mortgage and add a borrower who will struggle to make the mortgage payments so if the process you need requires switching borrowers, you can expect your financial information to be requested.

Mortgage lenders typically don’t offer an assumption option to borrowers in default

Depending on your investor and mortgage servicer’s guidelines, if the mortgage loan is in default, you cannot adjust the liability on the mortgage through an assumption without resolving the default issue.

In this case, you will likely end up in one of two possible scenarios:

  1. Your mortgage servicer will make you apply for a loan modification AND an assumption at the same time.
  2. Your mortgage servicer will make you apply for a loan modification FIRST to resolve the default issue and will only let you apply for an assumption after the loan has been brought current

Some lenders will allow the spouse who wants to assume the loan to apply for the modification with just their financial information (and the divorce decree and quit claim deed) but other lenders will require both parties on the mortgage to participate in the loan modification review before the loan can be assumed.

So, if you end up in a situation where your lender is telling you that the modification review must be done with both parties’ financial information before the loan can be assumed, you will likely have to work with your ex-spouse to get the loan modification done.

Even if your eventual goal is to get one of you off of the loan, your lender has the right to require that you both participate in the modification process until the default issue is resolved.

This can be difficult, particularly if the relationship with your ex-spouse is difficult. Oftentimes, one party wants to work on the modification but the other party doesn’t want to help.

Why the interests of both parties in a divorce might be the same in a loan modification

In a situation where both spouses are borrowers, the loan is in default, and the lender will not let one spouse assume the loan before modifying, understand this…

It is in the interest of BOTH spouses to resolve the default and avoid further foreclosure activity.

The legal liability on the mortgage attaches to BOTH borrowers. So, if the modification cannot go through due to one spouse’s failure to participate, the assumption will not be able to go through, and then the loan will be moved to foreclosure.

Then, BOTH spouses (regardless of their divorce status) will be facing foreclosure. An eventual foreclosure will impact the financial situation of BOTH parties, even if you were the spouse who lost rights to the home.

So, the best thing to do is to try and work collaboratively with your ex-spouse to get the loan current and back on track.

Then, the spouse who was awarded the property can apply for the assumption after the loan is current and out of default.

Can I refinance to get my spouse off of the mortgage?

A refinance can be used to remove an ex-spouse from the mortgage in a divorce situation but the mortgage has to be current in order to qualify for a refinance.

A refinance refers to the type of restructuring for a mortgage that is NOT in default. Part of qualifying for a refinance is showing a current on-time payments history.

With a traditional refinance, a new lender buys your mortgage debt, removes your ex-spouse and then writes you a new loan with new terms.

A refinance is different from a loan modification.

A loan modification refers to the type of restructuring for a mortgage that IS in default.

So, if your loan is current and you’re going through a divorce, a refinance may be a viable option to adjust the legal liability.

But, if the loan is in default, you will likely have to complete a loan modification first because you won’t be able to show the qualifying payment history needed for a refinance.

Many people do a loan modification first. The loan modification brings their loan current and then 6 months or so after the modification is finished, they complete a refinance.

What if I can’t afford the house anymore now that my ex-spouse’s income is gone?

The general rule for determining whether a mortgage payment is affordable for your household is:

Your mortgage payment should be about 30% – 35% of the total monthly household income

A mortgage payment that takes up approximately 33% of monthly household income leaves room for other required monthly expenses to be taken care of and provides additional funds that can be saved for emergency expenses.

This rule is also used by mortgage servicers when they’re deciding whether you can afford a loan modification so if the monthly mortgage payment takes up much more than 33% of the monthly household income, you likely won’t qualify for a loan modification.

It is very common for both people to have to downsize in a divorce situation, as the household income gets cut in half.

Just because you were awarded the property doesn’t necessarily mean you can afford it by yourself. If this is happening to you, it may be time to consider other options to avoid foreclosure:

  • Selling your home for equity: If you have fallen behind on mortgage payments but you have equity in your home, you can sell your home before foreclosure and walk away with the equity. You do not need your bank’s permission to complete an equity sale of your home, even if you’re behind on payments.
  • Short Sale: A short sale allows you to sell an underwater property for less than what is owed on the mortgage. Your mortgage lender approves the sale and then typically waives the deficiency balance (the remaining amount owed) so you can sell your home and move on without owing the remaining balance.
  • Deed in Lieu of Foreclosure: A deed in lieu of foreclosure is an agreement between yourself and your mortgage lender where you sign a document giving the house back to the bank in exchange for the bank agreeing not to foreclose on you.
  • Foreclosure Mediation: Buy time using Foreclosure Mediation and then sell shortly before your foreclosure auction: If you qualify for mediation under the WA State Foreclosure Fairness Act, you may be able to receive more time in the home or extend the foreclosure timeline so you can move on your terms.

If you’re a Washington state homeowner going through a divorce and have questions about how this may impact your mortgage, feel free to give me a call at (425) 654-1674.

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