Divorce and the house - Many times, especially in the current real estate market, it can seem like the best exit strategy:Â My ex wants to keep the house and he/she has the ability to make the payments.Â Our equity is dwindling - or perhaps there is no equity at all - so I'd rather just save my credit and not do a short sale or foreclosure, and wait until the market rebounds.
This can seem like a very plausable maneuvor, and sometimes it is.Â However, there are some very real concerns that need to be addressed when going through a divorce if you are going to be the "out" spouse, and allow your ex to keep the house.
First, be sure that you understand the difference between the Grant Deed and the Deed of Trust.Â Both are recorded documents, however they mean very different things.Â The name on the Grant Deed is who the rightful owner of the house is.Â The Deed of Trust is, basically, the mortgage note.Â So, the name(s) on the Deed of Trust is who is obligated to the bank for the mortgage.
It is not uncommon - divorce or no divorce - to have the names on the Grant Deed differ from those on the Deed of Trust.Â Common examples are 1) co-signers, and 2) when one spouse has better credit / income documentation and could qualify for better terms for a loan, often that spouse will be the only one on the note.Â In the latter, the other spouse would deed onto title (in happier times) and then we see one spouse on the Deed of Trust and two on the Grant Deed.
If at somepoint in your divorce, you are planning on leaving the house, your attorney may suggest that you quit-claim off of title - or the Grand Deed.Â That means that you will not be the legal owner of the house anymore.Â However, if your name is on the note, remember that the bank does not care about your divorce.Â You can not simply say, "Dear Mister Lender:Â I know I agreed to pay you $XXX,XXX, but I am getting a divorce now.Â So, you need to forget that I ever made that arrangement with you and go after my ex for the payments.Â Your's truly...."Â That's not how it works.Â The bank will hold you just as responsible as if you were married.Â
Therefore, if you do decide to leave the house and your ex is in charge of the payments, should he/she default, guess whose credit gets affected?Â Yours!Â And if you decide to apply for a home loan after your divorce, guess what is going to show up on your credit report?Â Your home loan.Â That means that you may not be able to qualify for a new house, because what we call debt-to-income-ratios will be skewed.Â Sometimes you can get around that by providing a divorce decree and showing your ex-spouse's cancelled checks, proving that he/she has been making payments, but they will have to be cooperative in doing that.Â Lending guidelines these days are as strict as they ever have been.Â Underwriters are not taking explanations like they used to; if they do accept the court order, they may require 6-12 months of cancelled checks.
If you do decide to allow your spouse to keep the house after the divorce, please be in contact with the mortgage company to ensure that the payments are being made in a timely manner.Â That is something that you will have to babysit until the house is sold, or there is equity in your house for your spouse to re-fi.
It may be a cleaner break to simply sell the house after your divorce.Â True, a short sale may have negative consequences, but it may be more peace of mind to know that your future is no longer in the hands of your ex-spouse.
If you have any further questions or would like any more information, please do not hesitate to contact my office.....we specialize in Divorce Real Estate.Â www.LaurelStarks.com