The Importance of Refinancing the Mortgage as Part of Divorce

By Staff Writer

As a part of many divorce settlements, one party retains the former marital residence. A new deed is drafted and the party keeping the home assumes responsibility for all household bills, including the mortgage payment. While this seems like a reasonable manner in which to divide a marital asset and apportion responsibility for marital financial obligations, one issue incident to this transfer is all too often overlooked.

Creditors, such as mortgage companies, are not parties to your divorce. For this reason, even if your divorce papers say that your ex is solely responsible for all future mortgage payments, in the event of a default, the bank can attempt to collect the unpaid balance from you. Your spouse’s late mortgage payments can effect your credit, appear on your credit reports and impair your ability to obtain future credit if you have not properly addressed the mortgage issue as part of your divorce settlement.

The best way to protect yourself is to ensure that only your ex is obligated to pay the creditor. If you are a joint-obligor on the mortgage, to do this, you will have to have your name removed from the debt. Some creditors will allow the removal of your name from the debt upon consent of both parties and a showing that the party seeking to be solely responsible for the debt has sufficient credit and income.

The above scenario is incredibly rare. Most creditors will require a formal “refinancing” in order to remove the name of one of the parties from the mortgage. In a refinance, the mortgage is transferred into one party's name in an amount sufficient to satisfy the old joint debt and to provide a cash buy-out for any equity the other party. Generally, this is the ideal way to satisfy debt and credit issues as part of a divorce.

If it is not possible to remove your name from the debt, the only way to protect yourself 100% is to sell the home and pay off the mortgage. This is usually a solution of last resort, particularly when the parties to the divorce have children.