Breaking Up is Hard to Do Part 2: Especially if you are Divorcing, Own Real Estate and Both Spouses are on the Loan

Some have described a Divorce as the closest thing to Hell on Earth. Add to that Hell the ownership of Real Estate where both Spouses are on the Loan to the Lender and the break up may seem nearly impossible. In Part 1 of this series we described the problems of a break up between non-married couples who own real estate, and contrasted the fact that the Domestic Relations Court has the ability to decide the equities and disposition of real estate between separating or divorcing spouses. However, that ability has limitations particularly where the non-party lender is involved.

This has been a recurring problem that this firm has been called upon to resolve many times in the Domestic Relations Case. Fortunately for our firm we have lawyers versed in real estate financing law and divorce law. Many times we have received the call from the divorced spouse who had been represented by a domestic relations lawyer unrelated to our firm, who did not understand real estate financing, and the person doesn’t understand why they can’t get financing for another home, or why the lender is trying to get them to pay the mortgage of their old home that the Domestic Relations Court ordered their ex-spouse to pay. Surely, they believe, the lender must understand that they are no longer responsible for the mortgage. If not originally handled properly, nothing can be farther from the truth.

The Domestic Relations Court has the power to decide which spouse should own the property and which spouse must pay the mortgage, with language. Most cases settle, and often one spouse agrees to keep the home, and the other spouse agrees to move out. Language often appears in settled divorces (or dissolutions) as follows, assuming in this scenario there is a note and mortgage that both husband and wife signed related to the marital home: “Husband shall have all right, title and interest to the marital home, to the exclusion of the Wife, and Wife shall quit claim her interest in the home to the Husband. Husband shall pay and save Wife harmless on all debt related to the marital home. Further, Husband shall pay to Wife $____ by and for Wife’s share of the equity in the marital home, with such payment being made to Wife within 30 days in readily available funds”.

Now, if the Wife thinks that she is doing great, she is very wrong. The Wife has now remained on the Note and Mortgage . She thought, no doubt, that because of the hold harmless language above, she was off the hook. Additional language was needed, requiring the Husband to refinance the marital home, or sell it, to remove Wife’s name from the note and mortgage within a specifically stated time period.

What the Domestic Relations Court does not do (and what a settlement document cannot do) is to require the Lender to release the other spouse from liability under the note and mortgage, because the Lender is not a party to the divorce action. That was a separate contractual agreement between the spouses and the Lender when they acquired the loan. If nothing else occurs, the Domestic Relations Court will typically require one spouse to quit claim their interest in the property to the other spouse, and the other spouse, theoretically is required to pay the mortgage.

What if the spouse who quit claimed their interest wants to buy another house since he or she lost the other one in the divorce? The problem arises when the new lender does a credit check. It will see that this person is still on the original loan. In determining whether this person qualifies for the new loan, the new lender will often take into account the outstanding loan ignoring the fact that the Domestic Relations Court has ordered the ex-spouse to pay it. Very often, this will prevent the person from qualifying for a new loan to buy a new house.

What if the ex-spouse stops paying the mortgage? Can the Lender go after the other spouse even though the Domestic Relations Court ordered the ex-spouse to pay it? The answer is yes! Remember, the Lender is not a party to the divorce action, and it has a separate contractual agreement between the two spouses, which usually says that they are both jointly and severally liable on the loan. What that means is if the ex-spouse does not pay it, the other spouse is responsible to the Lender to pay it. What about the Domestic Relations Court Order? There would be a basis to go into court on a Motion for Contempt, but that does not stop the Lender from pursuing action.

Can any of the above scenarios be prevented? Many times it can, and the prevention starts at the beginning of a full and final settlement, or in a trial brief for the Court to utilize post trial and before the written decision.