Q. My ex-husband and I purchased a home in 1971, using his VA eligibility. We separated in 1980 and were divorced in 1983. I have made all mortgage payments and other expenses since 1980. In 1984, I secured a second trust and bought his share of the property. The property was deeded to me as sole owner. Now my ex-husband wants to purchase a home of his own and we have discovered that he was not released from the mortgage we had together. Can I be legally forced to sell the house so that he can regain his eligibility? Could he purchase his home through FHA or a conventional loan and remain on the old mortgage? I am in the 20 percent tax bracket, very comfortable with the present home expenses and could not possibly qualify to purchase another home. What can I do?
A. You need do absolutely nothing. If I were to take a hard-line position, I could say that when your former husband transferred the house to you, he knew or should have known then of the problem, and having transferred the property to you, it is now too late for him to worry about it. The problem you have discussed, however, is very real. When someone obtains a Veterans Administration (VA) loan, that loan is fully assumable. That means that anyone who purchases your house can step into your shoes, and continue to pay the mortgage. There is no "due-on-sale clause" contained in any VA loan.
However, there are "assumptions" and there are "assumptions." Generally speaking, the word assumption has mixed meanings. A true assumption is a situation where your buyer, for example, takes over the legal obligations to make the payments, and you as the original borrower are fully discharged from any further obligations under that note. The second kind of "assumption" is technically known as "taking title subject to." Under this arrangement, if you sell a house with a VA loan, your buyer takes title, but is not legally obligated to make the monthly mortgage payment. The legal responsibility remains with you, the original borrower. Obviously, if your buyer wants to stay in the house, and not have it foreclosed, he or she will make sure that the monthly payments are made and kept current.
However, under a "subject to" arrangement, the lender still can look to you as the original borrower in the event of any delinquency or default.
Thus, when you received your property from your ex-husband, I suspect that no one made any arrangements with the original VA lender to release your ex-husband from his liability. While most lenders do not want to release the ex-husband under these circumstances, it still is worth the effort to discuss the situation in depth with the lender. Since you have demonstrated that you have made the payments promptly each and every month since 1980, it is possible that you can persuade the lender to relieve your ex-husband from his liability.
Alternatively, your ex-husband can discuss the situation with his potential lender, who might be willing to make some accommodation. For example, you might be asked to "indemnify and hold harmless" your ex-husband in the event that there is a default on the payments of your current house. I suspect that since you purchased the property in 1971, there is plenty of equity involved, and that any such indemnification will not be required.
More importantly, although your ex-husband has "contingent liability" with respect to the note he signed on your house, there is nothing stopping him from obtaining a new conventional mortgage, while remaining liable on the old note. I suspect that if he carefully explains the situation to his new lenders, they may be willing to work with him.
Incidentally, perhaps it is time for you to evaluate your financial situation. You have indicated that you purchased the property in 1971, and I suspect that you have an interest rate somewhere below 8 percent. Furthermore, you obtained a second deed of trust in 1984, and I further suspect that those monthly payments are based on an interest rate of 13 percent or 14 percent. Additionally, since you obtained a second trust, that loan is due in a shorter period of time than is a first mortgage, and thus your monthly payments may be rather high.
Do the numbers. Today, you can obtain a new first mortgage based on a 30-year conventional loan at an interest rate of approximately 11 1/2 percent. It may very well be that such a loan would be cheaper for you on a monthly basis than the combination of your old first deed of trust and your new second. You should contact your mortgage lender or tax adviser for further assistance.