On behalf of The Law Office of Gustavo E. Frances, P.A.
In divorce negotiations, problems can arise when one spouse takes over the marital residence with an outstanding mortgage debt. If he or she is not able to get immediate mortgage financing, it may create a difficult obstacle. The problem is that one spouse is now responsible for the mortgage loan under the settlement, but the other spouse remains technically responsible for the payments because the bank loan still holds both of them liable. This is a common problem occurring in Florida and elsewhere when one spouse takes over the home in a divorce but cannot immediately get a new loan in his or her name alone.
It seems easy enough to have the staying spouse simply assume the mortgage and become solely responsible on the payments. This may be allowed under certain government-backed loans, but it is generally not the policy of banks to let one of the borrowers walk away from the obligation. Thus, a simple agreement between the divorcing spouses that one of them will be responsible is not enough.
This is a weak assurance to the departing spouse whose name remains on the original loan papers. If the staying spouse defaults on the payments, his or her promise to the other spouse will be worthless, because there will be insufficient resources to normalize the situation. Worse than that, however, is the fact that the mortgage lender will report the default to the credit bureaus against both spouses because both names remain on the loan papers.
In Florida and elsewhere, the solution lies in a specially-worded agreement that is negotiated and drafted by the parties through their attorneys. It keeps ownership in both names until a new mortgage is finalized. The deed will be signed with the divorce papers but will be held in escrow by one of the attorneys until the new mortgage is completed. If the purchasing spouse cannot get a mortgage, other financial obligations between the two may have to be adjusted. Alternatively, the property will have to be sold and the proceeds divided as agreed.
The New York Times, “Divorce and the Shared Mortgage“, Lisa Prevost, Oct. 30, 2015