Often in divorces, the parties agree that one spouse will get the house free and clear after agreeing on a value and further agreeing to offset that value with other marital assets. There are multiple complications in making such an exchange, however. One of the most vexing is how to get the moving-out spouse off the mortgage.
Typically, the parties bought the house by obtaining a mortgage in both their names. And typically, the in-spouse blithely assures the out-spouse that they will take the out-spouse’s name off the mortgage.
Whoa, whoa, whoa… Maybe you can, maybe you can’t. Some mortgages will allow the in-spouse to assume the mortgage in just one name, for example. But this is not likely.
In the good old days of low-interest rates, you could often refinance the mortgage into just one name.
Lenders wanted to keep the business and were pretty flexible. But now, with mortgage rates as much as three times what they were less than a year ago, a refi is usually not a good deal for anyone except the lender.
Here is the fundamental concept you need to appreciate: your divorce judgment, with a court order that the in-spouse will get the out-spouse off the mortgage, is not at all binding on the lender. Think about it—how could the lender be forced to give up half its security for the loan through no fault of its own (indeed, the lender had no chance to say anything about the court order)?
The answer is: the court order is not binding on the lender.
Yes, if the in-spouse doesn’t pay the mortgage, and the lender comes after the out-spouse, the out-spouse can sue the in-spouse.
But not without a lot of hassle and severe damage to a credit rating. (In fact, merely being on the mortgage, even if the in-spouse faithfully pays it, makes it significantly harder for the out-spouse to buy anything on credit)
There is nothing the divorce court can do to resolve this quandary. But the divorcing parties can work with trained and experienced mediators, collaborative attorneys, and forensic accountants to look at realistic options and trade-offs and make the property exchange work.