Why taking over the mortgage is not a good idea

Division of assets in divorce includes splitting the equity in the marital house. As I have discussed previously, the fastest, cleanest option is for both parties to move out, sell the property, jointly clear their mortgage and split what is left over.

But what if one spouse wants to remain in the house and cannot afford either to refinance the mortgage loan or buy the other partner out? One option, which I generally do not recommend though clients often ask about, is for the resident spouse to indemnify the other, assuming full responsibility for the mortgage and property upkeep.

However, there is a problem. The spouse remaining in the house may agree to indemnify the departing spouse from liability for payment of the mortgage on the house, but this arrangement does not bind the mortgage company. If there is a default by the spouse remaining in the home, the mortgage company will still consider you jointly responsible for the loan. If there is a mortgage foreclosure proceeding, the mortgage company must proceed against the house and sell it. If the value of the house is less than the amount of money owed on the mortgage, the mortgage company can commence proceedings to collect any balance from either spouse – regardless of the indemnification agreement – pursuant to the Notes you and your spouse signed when you borrowed the money.

It is possible for the spouse exiting the marital home to write a letter of 100 words to file with the credit reporting bureaus to advise in advance that the remaining spouse now has the full responsibility for the mortgage under the indemnification agreement. If the resident spouse defaults, this letter may help you, but it will not exonerate you.

In short, an indemnification agreement pertaining to the marital home relies entirely on trust between two spouses who are usually getting divorced precisely because trust has been broken.

Will changing the Deed to remove one spouse help this transaction? It may actually make it worse for the departing spouse as it can make ownership of any equity unclear. For example, if the resident spouse defaults, the mortgage company sells the home and has cash left over after satisfying the debt, ownership of the balance may be subject to dispute if the Deed has been changed.

There are many reasons not to indemnify your spouse with regard to the marital property, but I like to be realistic. Sometimes, it is the only option available to two people unwilling to sell the house. I can help you consider your options in splitting the marital home, and teach you how to protect yourself in various scenarios. Call my office at 215-345-5259 for a free first consult to discuss how.