Divorced! You Are Still Liable for the Mortgage
Did you know you could still be liable for the mortgage even though you signed over the house to your ex-spouse with a quit claim deed because of a divorce? This is a common issue that could have a long-lasting impact on your ability to get credit and loans and even result in bad credit, foreclosure, and even bankruptcy. Keep reading to learn how to avoid this situation.
Updated on February 22, 2025.
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Key Points:
- Divorce doesn’t automatically remove liability from the mortgage, even with a quit claim deed.
- A quit claim deed only transfers ownership, not the mortgage obligation.
- This could impact your ability to get other loans.
Divorce Property Settlements
Most divorce cases are settled with an agreement prepared by a family law attorney. When a house is involved, the parties can sell the house and split the proceeds, or one spouse may sign over their interest in the home to the other spouse. But waiving your interest in the home does not mean you are no longer liable for the mortgage.
While a quit claim deed is typically prepared by the divorce lawyer, the problem is when the attorney does not fully explain the consequences.
The Confusion with Quit Claim Deeds, Divorces and Mortgages
A quit claim deed is a simple document, typically one page, that transfers an interest in real estate from one party to another. In divorce cases, when a spouse is going to refinance the mortgage, the mortgage lender will require a quit claim deed, a property settlement agreement, and the divorce decree.
This allows the spouse to refinance the mortgage solely in their name since the ex-spouse no longer has an interest in the home due to the quit claim deed. However, the quit claim deed does not eliminate the debt obligation with the mortgage lender.
Is it Possible to Assume the Mortgage Loan?
When the lender granted the mortgage, the bank required that both spouses sign the mortgage and promissory note. This creates a contract between the spouses and the mortgage lender. Transferring an interest via a quit claim deed cannot undo that contract.
Remember, the quit claim deed transfers an interest, not the debt or mortgage obligation.
The Consequences of a Quit Claim Deed
Unfortunately, when a divorce agreement is not explicit that the mortgage has to be refinanced and one spouse agrees to transfer their interest, that spouse remains liable to the lender until that mortgage is either refinanced, paid off, or the property is sold.
A Home Equity Line of Credit (HELOC)
At other times, a client may tell their divorce lawyer they just want x amount to cash out their equity interest. The spouse keeping the home qualifies for a home equity line of credit (HELOC) and does a cash out without refinancing. But the results remain the same, without a refinance of the home loan, both parties still remain liable for the mortgage.
The Effect on Credit Reports
Because that mortgage remains under the name of both spouses, that debt will be listed on their credit reports by the three major credit reporting bureaus (Equifax, Experian, and Transunion).
Because mortgages are long-term debts, with a typical length of thirty years, if the divorce took place ten years into the marriage, liability remains on that mortgage for the next twenty years.
If the spouse living at that property continues to pay the mortgage late, that will affect the other spouse’s credit report. This could prevent them from qualifying for credit. cards, personal loans, auto loans, and definitely mortgages.
How the Mortgage Loan Prevents You From Getting Other Loans
Suppose the ex-spouse pays timely. Then, there is no negative reporting on the credit report. However, it could still affect your ability to get credit because a lender may be concerned that you have too much debt.
For example, suppose the loan balance is $200,000. In that case, unless you have sufficient income and assets, another lender will not likely approve you for a new mortgage because of that original mortgage.
Look at this from another angle: if you barely qualify for one mortgage, you are now trying to qualify for a second mortgage. Again, this goes back to the issue that a quit claim deed only transfers a financial interest in the property and does not eliminate the mortgage obligation.
So, the mortgage loan may affect your credit score because payments are late. It may also affect your ability to get other loans because your debt-to-income ratio is too high.
What Happens if the House Goes into Foreclosure?
Imagine that your divorce case was finalized more than a decade ago. You signed a quit claim deed transferring your interest in the property to your ex-spouse. What happens if your ex-spouse, for reasons beyond their control, such as loss of employment or personal injury that results in disability, can no longer afford the mortgage?
If the lender proceeds to foreclosure, you will be served with the mortgage foreclosure lawsuit since your name is listed on the mortgage. Now imagine your ex-spouse files for bankruptcy. What happens next? Legally, you are now responsible for that mortgage
This could result in you filing bankruptcy because of a home you have not lived in for over a decade and have nothing to do with. This will get further complicated if you have accrued assets post-divorce and don’t qualify for Chapter 7 bankruptcy.
This could result in you having to file Chapter 13 bankruptcy and pay back a portion of that mortgage, or depending on your amount of debts and assets; you might have to file Chapter 11 bankruptcy.
How to Protect Yourself Moving Forward
It has always been my advice to clients in a divorce case to seek the sale of the property or a complete home refinance. If not, a client is on the hook for decades for the mortgage debt. As stated before, even if the payments are made timely, it could prevent the client from qualifying for other loans.
Therefore, if a quit claim deed is done, it is because of a refinance on a home loan. To protect yourself, proof of the mortgage pre-approval letter should be provided to you.
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