There is another, little-known option that can avoid refinancing and the high cost associated with refinancing a home, which generally runs 3 to 5% of the outstanding loan amount. You simply ask your lender to remove the former spouse’s name, leaving the mortgage in your name only.
The only problem is that not all lenders or mortgage servicers offer this option, known as "Release of Liability" OR Qualifying Name Delete Assumption.” A "Name Delete Assumption" is done when one party or the other on a mortgage loan wants to be removed, but the remaining party really does not want to refinance, perhaps because of fees, rate or in your case property value. If the remaining party can be proven to qualify on their own, the other party can be "deleted" from obligation, but the loan stays exactly as is and the costs are minimal.
This process will leave the existing loan in place, but would relieve the non-occupying spouse from their obligation on the loan.
The lenders and servicers that do will most likely run a separate credit check on you, requiring, for example, that you meet minimum credit scores (typically from Fannie Mae, the giant government buyer of loans), and ensuring that you are current with the monthly mortgage payments. They may also require that any investors in the loan, after it is sold off, agree to the deal.
And if you are “under water,” and owe more on the mortgage than the home is currently worth, this process is not an option.
In regards to being "under water" OR when you are going through a divorce you may also wants to ask the lender or servicer to do a loan modification. Banks have been modifying loans for decades when there is a hardship in a family. Hardhsips may be any of the following:
•Reduced / lost income
•Medical or disability
•Unexpected expenses
•Divorce
•Business failure
•Caring for a family member
•Credit card debt
•Escalating ARM
•Loss of rental income
•Etc.
A loan modification will allow the spouse that keeps the home to get the loan terms modified. That could be a reduction of the interest rate, the loan term to be extended (15 to 30-year) that will help the spouse get a lower monthly mortgage payment.
That is also a great tip because if both spouses are on the loan, that will give the spouse that leaves the house some peace of mind as the other spouse will be able to meet the monthly financial obligation more easily and maybe will help avoid default on mortgage payment, credit card accounts that both spouse have in common.
In regards to Name Delete Assumption keep in mind that lenders seldom have a reason to take a co-borrower’s name off the note. But, if a homeowner can prove that he or she can afford the payments and meet the required credit criteria, typically those of the investor in the loan , then release of liability may work. The lender will require the borrower to prove that the borrower is able to support the monthly payments without the co-borrower spouse,” typically through monthly bank statements, annual tax returns and investment statements.
Having the name removed from the loan obligation protects the credit of both parties. If the former spouse failed to pay other debts, a lien could be placed on the home, and if you were delinquent on the mortgage payments, both spouse’s credit could be hurt.
Most divorce settlements stipulate one of two outcomes for marital property. Either (1) the house must be sold, or (2) the person wanting to keep the property must buy out the other’s share, usually within months of the date of the settlement, and get the other party’s name off the mortgage, either through refinancing or a Name Delete Assumption typically within a year.
Under the option (2), the former spouse signs a quit-claim deed at the divorce settlement, relinquishing his or her claim to the property. But while that action takes the former spouse off the house’s title and leaves it in one name only, it does nothing to remove his or her name from the actual mortgage note. It is very important to get your name off the mortgage if you are going to be off the title.
Lenders or servicers typically charge $300 to $1,000 to execute a Release of Lliability or Name Delete Assumption and require the property owner to pay an additional, nonrefundable application fee, typically $250 to $500. The process can take from 30 to 90 days.
Still, a lender or servicer generally has no obligation to release one of the borrowers. But homeowners may have one point of leverage. Qualified borrowers not granted the release or delete assumption can tell their servicer or lender that unless a release of liability can be executed, the borrower will refinance the mortgage at another lender. In such cases,the servicer/lender might agree to do it.
In any case in case you are going through a divorce, I highly suggest that the spouse staying in the home should seek a loan modification and the spouse leaving the home should seek a Name Delete Assumption. Those two solutions will help divorcing spouse avoid tremendous financial stress cause by a divorce.
Andre Luc Plessis
REALTOR®, RCS-DTM REALTOR® & Financial Educator
Keller Williams® Realty
The Wealth Creation Team
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