While a marriage may end, mortgage debt continues until the divorced parties find a way to resolve it. While the marital home is often the primary asset of a married couple, a muted real estate market can make the house the largest debt of the marriage. Determining how to apportion, transfer or pay off the couple's mortgage debt can become the unwelcome focal point of the divorce negotiations.
Jointly Retain the Home
When a divorcing couple have both signed a mortgage note, unless they sell the house or refinance it into one of their names, both are legally responsible to the lender for repaying the mortgage, regardless of the terms of any divorce decree. One option, though it may sound unpalatable to many individuals in the midst of divorce, is to simply retain the house in joint ownership, with continued joint responsibility for the mortgage. The special form of husband-wife ownership of the real estate is converted to a tenancy-in-common in which each spouse has an undivided one-half interest in the property upon divorce. This option would still make it necessary for the former spouses to decide who is actually going to make the mortgage payments, and would require ongoing communication and cooperation.
Selling the Home
Selling the house, paying off the mortgage and splitting any remaining proceeds by whatever proportions the parties deem appropriate may be the easiest, cleanest way to relieve both former spouses of the mortgage debt. Selling the house lets both parties walk away without a lingering liability on their credit records and with no need to communicate further about the mortgage. However, a depressed housing market or a mortgage debt that exceeds the current fair market value of the house may render this option impossible. Emotional connections with the house or fear of further disrupting the lives of minor children by moving may also make this option less desirable.
Refinance to One Spouse
Transferring the house to one of the former spouses, and having that party refinance the mortgage in her name alone, can relieve the other spouse of mortgage debt obligations and allow the parties to part ways with no further joint mortgage obligations. However, an order of the divorce court in itself does not make this happen. One spouse must sign a deed releasing his interest in the property, and the other spouse must obtain a new mortgage based on her income alone. The divorce court can set a time limit for obtaining the mortgage, and specify a contingency plan, such as selling the home, if the spouse cannot secure financing.
The business of mortgage debt in a divorce gets stickier when the marital home is underwater -- that is, when the mortgage exceeds the present fair market value of the property. One possibility is to have a short sale, which involves selling the house for less than its mortgaged value and attempting to negotiate down the remaining debt with the bank. The couple could then split whatever debt is still owed after negotiations. Walking away from the house and allowing it to go into foreclosure is another option, and in some circumstances, may be the only option. However, this will negatively affect the credit ratings of both parties.