When a married couple takes out a home loan, the note and deed of trust that secures the loan are in both names. Often as part of a divorce settlement, only one spouse is awarded the property. This can present a credit dilemma to the spouse who didn’t receive the property. This is because both spouses are still liable on the note and deed of trust. In other words, a court decree doesn’t take either party off the liability to the existing lender.

From the court’s viewpoint, only one party is responsible for the loan on the property, but from the lenders viewpoint, “both” parties are still liable. Usually one party will transfer their ownership interest to the other party. This simply transfers the “equitable ownership” to the spouse who is receiving the property. “Equitable ownership” refers to the right to live on the property and do things like continue to improve it or add more home loans. Both parties still remain on the original note. Sometimes the spouse living on the property will stop making payments, thus negatively affecting both spouse’s credit.

If you find yourself in this position, there are a few steps you can take to make sure your own credit isn’t negatively affected by the actions of your ex-spouse.

Have the Other Spouse Refinance Solely Into His/Her Own Name

The best way of taking yourself off the obligation of a mortgage on a property you had with your ex-spouse, is having the ex-spouse refinance the original loan into a new loan in their name alone. This way there is no confusion; only the person who continues to own and live on the property will be liable for the loan. Since there are usually costs associated with taking out a new loan, the spouse going off-title usually helps the spouse who is staying on title with some of the costs.  It’s worth helping out with the costs to free your self  from any obligation on the mortgage , ensuring your credit won’t be adversely affected because of your ex-spouse.

Keep Track of the Divorce Decree Paperwork

If your ex-spouse is unable to refinance into their own name, you’ll need to carefully document that your ex-spouse was awarded the property in a divorce decree. Your credit rating will still be negatively affected if your ex-spouse fails to make payments. However if you’re trying to buy another property, you’ll be able to document that you’re not responsible (according to the court) for the old loan. This is important, because in order to qualify for a new loan, you need to meet certain debt-to-income ratios, and you may need to assure the new lender that your ex-spouse was awarded the old property in a divorce decree. Your name will still show on the old loan, however the new lender might assess the situation and not count the old payment against you (even though technically you’re still obligated on the loan.)

Consider Buying Your Old House from Your Ex-Spouse

Since remaining on an old loan can be messy, you might consider buying the old home from your ex-spouse. There might be some advantages to your ex-spouse in doing this such as getting cash from the proceeds, or perhaps releasing them from a payment they can’t really afford.

Verify That the Old Loan Payments Are Still Being Made

If you can’t get your spouse to cooperate in any way, you can at least verify the status of the old payments. Because technically your name is still on the old loan, you can ask the old lender to provide a copy of the payment history from the date the property was awarded to your ex-spouse. This way you’ll be aware and able to address any messy credit issues if payments aren’t being made.