Often, as part of a divorce settlement, the former spouses agree that one party will keep the family home while the other will move to another location. They execute a Deed of Transfer, transferring ownership, from both parties to the party who wants to keep the house. The next step should be for the sole-owner party to refinance and to obtain a new loan. They obtain a loan in their name and fulfilling the terms of the former loan which included both party’s names. What happens if the sole-owner spouse does not refinance and both spouses remain on the mortgage loan?
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Your loan liability is the obligation you incur when you finance the purchase of a home by taking out a loan.
The Family Home
After a divorce, the party who no longer resides in the family home will most likely never know that the party, who kept the home, did not refinance unless the mortgage payments are not being made and the home goes into foreclosure. When this happens, the party who no longer “owns” the home will be surprised with calls from creditors and discovering notice of foreclosure on their credit report! Remember, your loan liability continues even though a family law court may have awarded the home to the other spouse.
How Did This Happen?
Should the party who now owns the home not refinance, both former spouses loan liability will remain in place for mortgage payments even though one spouse transferred the deed to the other spouse. Remember, a deed only establishes ownership and transferring a deed has no effect on the mortgage loan, any home refinancing, or your loan liability. So, although one spouse has given their right of ownership, they remain liable for the mortgage loan. Needless-to-say, the effect will be that both parties will now have suffer the results of a negative credit incident and a reduced credit score.
Since both parties are liable for the loan, any lack of payment is reported on both individual’s credit reports. Should the account become delinquent, regardless of the reason, the delinquency too will be reported on both spouse’s credit reports. This will severely damage their credit reports and credit scores for up to 7 years.
Contacting the Mortgagor
Calling the mortgagor (lending institution or bank) about your loan liability will lead to more frustration. The “Bank” will explain that, not only will they not recognize a court order, but any such order does not alter your loan liability or obligation to pay back the loan. Although you may, at first, be dazed and confused as to how a Bank could be so bold to take a position that apparently violates a court order, this really is not the case. Take a closer look at the court order and you will find that the court did not instruct the “Bank” to take any action. If you think about it, the court could not order a non-party (the Bank) to take any action since the court does not have jurisdiction over the Bank in the case.
Effects of Bad Credit
The failure of your former spouse to refinance and the effect on your credit can cause other problems. Often, the party who no longer owns the home discovers that their bad credit has prevented them from getting a job. Many institutions require background checks which will reveal your bad credit and they may use this to disqualify you for a position that deals with financial matters or security.
The former spouse who no longer owns the home will also suffer from increase interest rates when they apply for auto loans and credit cards. Their credit history makes them a risk which allows lenders to charger higher interest rates or to require additional deposits.
Landlords are also likely to require higher deposits and or additional “up-front” monthly rents for those former spouses who, although they do not own the home, remain liable for the debt.
Limiting Your Loan Liability
To limit or eliminate your loan liability, you should refinance any joint installment loans into one person’s name. This applies to home loans and to car loans. Essentially one spouse will be buying the asset from the other spouse. If neither spouse can afford to buy the assets, both of you should agree to sell the asset and split the proceeds. It’s much easier to divide cash than to divide a house or car.
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