QMy husband and I are getting a divorce. Our children are under age 18, and he has agreed to let me buy out his share of the house on condition that he can be released from our original mortgage loan. There are about 12 years left on our mortgage, which carries an interest rate of 7.5 percent. The mortgage company will allow the title to be transferred exclusively to my name, but will not permit my husband to be relieved from responsibility as a co- signer on the mortgage note. What do you recommend? Neither of us wants to sell the house.
AUnfortunately, this is a common situation. When a couple get divorced and the parties agree that one of them will own the property, they often forget there is a lender in the picture that wants to keep holding both parties responsible while the original loan stays on the books.
Your lender's position makes sense from a business point of view: When you and your husband originally obtained a mortgage loan on your house, both of you agreed to be responsible for repayment of that loan. You are now getting divorced and agree the house should go to you. Although the lender cannot stop the house from being transferred to one of the parties, it is not obligated to remove either party from the loan obligations, as long as that loan stays on the books.
Years ago, lenders took the position that when there was a transfer between husband and wife in connection with a divorce, that transfer triggered the "due on sale" clause contained in the mortgage documents. That clause, which has been upheld in courts in a majority of the states, basically says that the loan becomes fully due -- and can be called by the lender -- on the sale or transfer of the property.
The purpose of this clause, from the lender's point of view, was to prohibit loans from being assumed by others. In your case, if you and your husband were to sell the property to a third party, in the absence of a "due on sale" clause, that third party could assume the existing interest rate without paying any points or other assumption fees.
Clearly, if mortgage interest rates are high, it is nice to be able to allow some third party to assume your existing loan -- i.e., just step into your shoes, avoid dealing with a lender and just start paying the mortgage where you have left off. But the "due on sale" clause means the loan cannot be assumed automatically without the lender's permission.
In 1982, however, Congress specifically addressed this "due on sale" clause. A new law made it clear that for most loans, the lender could not enforce such a clause on residential property containing fewer than five dwelling units when the transfer or sale results from a decree of dissolution of a marriage, a legal separation agreement, or from an incidental property settlement agreement by which the spouse of the borrower becomes an owner of the property. In other words, the lender cannot enforce the "due on sale" clause when the property is being transferred from one spouse to another pursuant to a divorce.
Thus, one of your problems has been solved by this law. If your husband transfers the property to you, the "due on sale" clause that I suspect is contained in your mortgage loan documents cannot be enforced.
However, even if the lender cannot enforce the "due on sale" clause when the property is transferred to you, the lender does not have to relieve your husband of his legal obligations under the original note you both signed when you bought the property.
There are two solutions. Both of you can sell the property and divide up the proceeds. Under this arrangement, the old lender will be paid off, and each of you will be relieved from liability. However, you have indicated this is not the route you wish to take.
Thus, your only other solution is to obtain a new mortgage loan (i.e., refinance) and get the new loan into your name only. Actually, with mortgage interest rates slowly inching up from their all-time low these past couple of years, you should refinance your current 7.5 percent mortgage regardless of your marital situation. If you can qualify on your own for a new loan, I recommend that you refinance as soon as possible, and the deed to the property can be transferred from your husband directly to you. Perhaps your husband can assume some or all of the closing costs involved in the refinancing process; after all, he is going to benefit when you refinance because his name will be released from the existing mortgage loan.
If, on the other hand, you are unable to qualify for a refinance loan, your husband should still allow the property to be transferred to you. However, he still will be potentially liable on the original loan.
What are the consequences to your husband under these circumstances? Basically, I can foresee two potential problems.
First, if you cannot make the monthly payments on the loan, and if the house is sold at a foreclosure sale for less than the amount owed to the lender, the lender might be able to go after both of you for what is known as a deficiency judgment. This could cause potential credit problems for everyone involved.
Second, and perhaps of greater concern, your husband may have trouble qualifying for another mortgage loan in his own name because of his potential liability on the current mortgage. However, my experience has been that lenders are not really concerned about this problem, especially if your husband has the financial ability to qualify for a new loan.
These are complex issues that deserve full and open communication between you and your husband. Your respective lawyers should attempt to work out these problems, based on all of the facts and all of the financial information available. The decision cannot be based on emotional considerations.
Benny L. Kass is a Washington lawyer. For a free copy of the booklet "A Guide to Settlement on Your New Home," send a self-addressed stamped envelope to Benny L. Kass, Suite 1100, 1050 17th St. NW, Washington, D.C. 20036. Readers may also send questions to him at that address.