Your credit could be tied up for years if you quitclaim your ownership interest of the house to your spouse or ex-spouse. This could hurt you even if you maintain excellent credit. This future impact may be overlooked in a divorce agreement.
Credit Score and Debt Ratios are Two Separate Issues
There are two separate issues at play here;
- The impact of your mortgage payments on your credit
- The debt load a future lender considers safe for you as a new borrower
The Impact of Your Mortgage Payments on Your Credit
Even if your ex-spouse makes perfect payments on the mortgage, the debt will still show up on your credit report. The ex’s perfect payments will actually strengthen your credit without you having to pay a dime. If the ex doesn’t pay on time, it will hurt your credit score. Your lender doesn’t care about who bears the responsibility in the divorce agreement.
The Debt Load a Future Lender Considers Safe for You as a New Borrower
The mortgage balance will continue to show up on your credit report, which will hurt what is called your “debt ratios”. This may mean you have too much debt to be qualified for your next mortgage when you want to buy a new home.
This could tie up your credit for years. Even if you have excellent credit, and even if your ex made perfect payments, your ability to borrow may be tied up in a knot. Please consult with a mortgage professional before quitclaiming a deed to your ex-spouse. If you owe more on the house than it is worth, please consult with a short sale Realtor.
What is a Quitclaim? Aren’t I Getting Rid of the House?
It's a common misconception that if "I give her/him the house" you are done with the responsibility for the loan.
If you are signed on the loan, the lender will hold you responsible for the payments whether you have an ownership interest or not. "Giving the house" is often referred to as a "quitclaim". In a quitclaim deed, you are resigning from ownership of the house, but it doesn't take you off the loan. It is sometimes erroneously called a quickclaim deed. It is advisable to consult a real estate lawyer to review ownership transfers.
Sever those bonds to the mortgage!
Be extremely cautious of divorce agreements that leave you on the loan, especially if the payment is realistically too high to handle.
If there is more owed on the house than it's worth, you should consider a short sale. In a short sale, the lender agrees to let the house sell for an amount SHORT of the payoff. In an ideal short sale, the lender forgives the deficiency and you never have to pay it back. It varies from case to case. Please call a Realtor who specializes in short sales. You need a realistic assessment of the value of the house in today's current market. I have seen too many cases where the spouse got stuck with an unsellable house even though it appraised for much higher than what it can actually sell for. After months or years of trying to sell the house for "appraised value" the spouse figured out they're stuck and needed a way out to avoid foreclosure.
In the Louisville KY and the surrounding counties, please call Dave Halpern at (502) 664-7827.