Can I ask my Mortgage Company to Remove my Ex-spouse from the Mortgage Obligation in a Divorce?
About 100 times per year (twice a week) I dance around the subject of both spouses securing the mortgage obligation when buying their first home. For most home purchases we participate in, one spouse has the ability to carry the debt (qualify) without using the other’s income.
When this scenario presents itself I point that out to the couple. It would however be distasteful for me, at the point of a glorious home purchase, to cite the statistics on the likelihood of a future divorce. Yet, unfortunately, statists say divorce happens and the couple may elect to permanently depart from the residence at separate times.
So instead of demonstrating a total lack of empathy and detailing this potential scenario, I frame it differently with the following analogy:
A mortgage is, on average, a debt obligation in the form of a backpack weighing 500 pounds (GoldCoast’s average mortgage = $500,000). When both spouses secure the debt each spouse is volunteering to don a weighted backpack. The load is not split into two halves. EACH spouse carries the full 500 pounds. NOT 250 and 250. That means you have two backpacks at 500 pounds each. That equates to 1,000 pounds in cumulative weight.
The “weight” is the security of mortgage debt.
Heck if the bank underwriters could grab a 3rd or 4th borrower, they certainly would; 1000 + 500 + 500.
Is it excessive or redundant? Why sure? The securing bank will obtain obligatory signatures from every borrower that raises their hand. Better for the bank.
So here’s the conundrum – I need to explain all this to the clients that have bequeathed their full trust to us, but never insinuate that their marriage may fail.
Typically the analogy of the weighted backpack suffices the subject with a logical nod of agreement. Yet occasionally we need to go into a further level of detail. What if the borrowing spouse should predecease the non-borrowing spouse – would the mortgage be “called”? Not on those terms alone. The death of the primary borrower would not trigger a foreclosure or “callable” event. But the other default features would remain in place, such as, the survivor would need to keep up with the mortgage payments (a simple term life insurance policy would work well).
Other objections come up from time to time that one spouse feels “excluded”. The Non-borrowing spouse will still have a Deed written in their name. They still own the house with all the rights they would have been granted had they guaranteed the debt.
When it is explained to them that the non-borrowing spouse still plays a role in the transaction and attends the closing, signs several documents including the Mortgage (but not the debt), and other documents giving the borrowing spouse permission to leverage the homestead, they typically relax.
So what happens when a divorce does occur where only one spouse is on record as a borrower?
It provides options.
When the husband or wife moves out, it creates a redundant housing expense. And when the divorce is finalized the departing spouse may want to purchase a separate home while the original homestead may be retained by the spouse who stays.
One option is that if the home is to be retained, 50% of the time the departing spouse won’t need to demand a refinance (to remove their name). It also provides additional options for the departing spouse to receive their equity due without selling the home.
Does it cure all financial issues?
But imagine the sigh of relief when trying to sift through the carnage of divorce you discover you can keep the mortgage (and savory interest rate) which allows you to retain the house and not be forced to involuntarily sell it. In many cases, the remaining spouse can’t qualify (nor afford) to refinance the existing debt (and even less likely at a 2x or 3x higher interest rate). The marital home and the stability it would provide to the remaining family members – are vaporized as if they were standing on a pier that vanished.
Or, the points involved to purchase an equivalent rate amounting to over $150,000.
You get the point (pun intended).
Now to answer the title question of this article.
The answer is an emphatic No,
A legacy mortgage (and rate) would never be re-written sans one party yet keeping the existing terms. Bad for the bank.
I’ve seen it asked. Many times. Over more than two decades, the Same universal result: nope.
So the correct answer really starts with competent counsel before the project ever begins.
The paradox is ….
that mortgage companies rely on divorce as a trigger event for refinances and future business.
Many have built an entire business model around it. There are mortgage companies that specialize in only divorce work.
Our clients, at a time of the devastation of divorce, don’t need to add a herculean load to their expenses by refinancing from a fixed rate of around 2.xx% to 6.xx% and incurring new costs combined with the silent assassin of involuntarily resetting an amortization schedule back to square 1.
Sure we’re missing setting ourselves up for future refinance opportunities for 40% of our clients.
But what we will always have is the honor to unwind mistakes that are created at the hand of other transactional Loan Originators. This includes the same cast of charters who are endorsing and pushing ARM mortgages and HELOC mortgages with 19.99 maximum interest rates.
If you would like to discretely review your situation, please us at JDonlon@GoldCoastMortgage.com