Excerpt from Book #10

"Purchasing or Refinancing Your Home"
By Luanna Bayer, Mortgage Specialist

What do you need to know before refinancing or purchasing a home to get the best result, and how might a divorce affect your ability to do so?

I. PROPERTY OWNERSHIP AND MORTGAGE OBLIGATIONS

If you are an owner of real property and a signer on the mortgage obligation, it is important you realize that signing over your ownership interest to someone else will not simultaneously remove your liability for the mortgage.

A. The Lender's Rights

Giving up your current interest in the ownership in real property either to a spouse in a divorce or to a third party is called "quitclaiming."* It does not relieve you from the mortgage obligation on that property if you have signed the existing mortgage note. It merely means you can no longer make decisions regarding the property. This situation is a common occurrence in a divorce. Although it is not unusual for spouses to agree that one spouse will take the house and be responsible for the paying the mortgage, the lender can still look to both spouses for payment unless you refinance the mortgage. In a divorce, it is usually best for spouses to completely separate their financial obligations and investments.

For example, if the spouse who is taking the house makes late payments or there is a Notice Default or an actual foreclosure, these actions will appear on both spouses' credit record. The spouse who is no longer the owner will have to see that the payments are made or that the foreclosure is cured, if that spouse wishes to preserve his or her credit. Often, that spouse may not be aware of late payments or nonpayment.

The only way to remove liability for the mortgage is to refinance the property in the name of the spouse taking it as his or her sole and separate property, or to sell the property to a new buyer and pay off the existing mortgage.

B. Federal Housing Administration (FHA) Exception

A Federal Housing Administration (FHA) loan offers an exception to continuing mutual liability when both spouses are on the mortgage. If the owner of the home is the occupancy and can show that he or she has made the mortgage payments for at least six months, the FHA will transfer the mortgage into the owner's name without the usual qualifying process. In this transaction, no additional cash can be taken out of the existing equity.

*You can also give up your interest in the property by signing a Disclaimer Deed. "Disclaiming" means giving up any present or future interest in a property and is usually relevant when a new mortgage is being obtained by one spouse and the couple is still married. The spouse who is not purchasing or refinancing the property will be asked by the lender to sign a Disclaimer Deed to protect the lender (and the other spouse) against any claim of marital interest in the property. The spouse signing the Disclaimer Deed will not be on the new loan.