by Timothy M. Pletter
When two or more people buy a home together, they will all be named as owners on the deed. If they borrow money to buy the home, they will all sign the mortgage. A mortgage gives the bank an interest in the home as collateral for the loan. The mortgage alone does not create a debt. Although all of the people who are named on the deed must sign the mortgage, they do not all have to sign the note.
The note is the document that states the terms of the loan. The note is the promise to pay the money back. It is possible to be one of the home buyers named on the deed, but not be one of the borrowers listed on the note. The note is the document that determines if the mortgage will be reported on a homeowner's credit report.
Sometimes things don't work out between co-owners.
Clients ask me, "Can I take my name off the mortgage?"
It is helpful to review the clients' closing papers. First I must know who is on the deed. The deed tells me who owns the property.
It is possible to quit claim deed the property from one owner to the other. However, this will change the ownership of the property, it will not affect the debt to the bank. In other words, a quitclaim deed will not remove a co-owner from the note. If both parties signed the note, then the best way to remove one owner from the note is for the other owner to refinance. When one owner refinances, they take a new loan to pay off the old loan. Once the old mortgage is paid off, then one of the owners has successfully removed themselves from the note. Unfortunately it is not always possible for one of the owners to refinance. When property values go down, there may not be enough equity to refinance.
Sometimes an owner's credit score is too low to refinance. If refinancing is not an option, then selling the property and paying off the mortgage may be the best solution. If the property's value is less than the mortgage debt owed, selling might require a short sale, meaning a mortgage company could settle for less than a full payoff. A short sale is not good for either borrowers' credit report. There can also be income tax consequences. In some short sales, debt is not forgiven and borrowers can be sued after the sale is completed.
Mortgage companies generally do not release one party from the note under any circumstances, unless one party files bankruptcy.
A loan modification can reduce the monthly mortgage payment. If one owner leaves and quit claims their interest to the other owner, such as in a divorce, the loan modification may be based on the remaining owner's income. However, the mortgage will continue to be reported on both parties' credit reports. One solution to this ongoing obligation is for the party who wishes to be removed from the mortgage, to file a Chapter 7 bankruptcy.
If a co-owner quit claims the property and receives a Chapter 7 discharge, then they will have no ownership in the home and no obligation on the mortgage.
Their name will still be written on the mortgage document, but it will have no further effect.
So in summary, there are three ways to remove your name from the obligation of a mortgage debt.
1. Co-owner refinances after quit claim deed.
2. Sell the property and pay off or settle mortgage debt.
3. Quit claim house to co-owner and file bankruptcy.
Timothy M. Pletter
Ambrogio, Pletter & Associates, LLC
2019 Main Street
Stratford, CT 06615