Many couples who are going through a divorce also find themselves with the prospect of losing their house to foreclosure. Depending on whether one spouse wishes to maintain the house or whether neither spouse wishes to keep the home, you may be able to take advantage of some alternatives to avoid foreclosure. In the first instance, you must decide if one or both spouses are jointly and severally liable for the mortgage and promissory note secured by the property.
During a divorce, if just one spouse signed the mortgage and the promissory note, that spouse would be the only one who would be liable for the debt associated with the property. If a foreclosure resulted in a deficiency judgment against one of the spouses, the other spouse would be exempt from any collection efforts by the lender. The lender might pursue each of the spouses individually if both of them signed the note, making each of them responsible for a deficiency judgment and subject to legal action.
When One Spouse Wants to Stay in the House
A spouse who wishes to maintain the property should assume responsibility for making the monthly mortgage payments, and the other spouse should be relieved of their obligations under the mortgage agreement. In these situations, there are two primary alternatives. Either the spouse who wishes to remain in the house can take the mortgage, or the spouse who wishes to remain in the home can restructure the loan in such a manner that just their name remains on the loan. It is possible that couples will lose their homes if nothing of these measures is taken, and the spouse who retains the foreclosure stops paying mortgage payments after the divorce. This might have a negative impact on both couples’ credit and make them jointly and severally responsible for any deficiency judgment.
It is important to note that if the mortgage has a due-on-sale condition, you may be unable to take over the loan. When the property is sold or transferred, the whole loan sum must be repaid, and the loan must be repaid in full. Garn-St. Germain Act, which is federal legislation, precludes the implementation of due-on-sale provisions in property transfers resulting from divorce or legal separation in the vast majority of jurisdictions. Within the time period specified by the Act, several states, however, enacted their own limits on due-on-sale provisions of their own own. If you live in one of these states, your mortgage will be controlled by state law, rather than federal law, which is beneficial to you.
Refinancing might be a more convenient option in some situations. A property settlement in a divorce may state that the spouse who retains ownership of the house would refinance the loan in their name and relieve the other spouse from the need to pay the mortgage. This works only if the spouse who stays in the house has a strong credit history and adequate financial means to qualify for a new loan.
When neither spouse wishes to live in the house
Even if you do not intend to maintain the house, you should make every effort to avoid foreclosure. The spouses may be able to sell the house in order to pay off the debt, or they may be able to reach an agreement with the lender on a short sale. (See this page for additional information about short sales as an alternative to foreclosure.) Additionally, the couples may choose to explore renting out the house and utilizing the rental money to help pay off the mortgage. In yet other instances, the lender may agree to accept a deed in lieu of foreclosure as a means of gaining possession of the property. In order to ensure that you are fully aware of all of your choices in this complicated circumstance, you should contact an attorney who has extensive expertise in handling divorce and foreclosure cases.