October 28, 2009

Divorce Myth: Remaining Jointly Liable for a Mortage Loan Will Prevent Me From Getting A New Mortgage

One “Divorce Myth” we come across is the belief that if a spouse cannot remove you from a mortgage loan at the time of divorce, it will prevent you from obtaining a new loan. This is a divorce myth because it is a commonly held belief (even by some lawyers) and is completely false.  In today’s real estate market and economy, more and more people are remaining on loans with an ex because the ex can’t refinance because of tightened lending standards and decreased home equity.  There are some problems remaining joint on a loan with your ex if they have been or they may turn into a late payer.   While your credit could be damaged if your ex doesn’t pay the loan timely, you should still be able to get a new mortgage loan if you would otherwise qualify to do so.  HUD Document 4155 outlines the requirements for FHA underwriting in regards to excluding a joint mortgage from consideration on a new mortgage application.  Per the HUD rules, for FHA transactions, joint mortgages can be excluded from consideration in a new credit application if:

(1) the divorce judgment contains  a release of liability for the borrower or the assumption of liability by another party

(2) title has been transferred to another party

So what does this mean to divorcing parties with real estate? Try to get off the loan if your ex has a history of late payments or you expect a future of late payments. If you can’t get off the loan because your spouse can’t refinance, but he or she has good credit you expect to continue, insist on an indemnification clause, and don’t worry so much about being unable to get a new loan.