—Which partner takes responsibility: If I were drafting an agreement for a loved one, not knowing who was more likely to be the remaining or the departing partner, it would grant the remaining partner 14 months to make the settlement payment, and to get the departing partner removed from the note. Otherwise, the house must be sold and the mortgage paid off.
—Implications of a declining market: If the house is worth less than the mortgage balance when the couple split, which is likely if they purchased at the peak of the market in 2006, the options are grim. The house can’t be sold unless the partners pay the deficiency. If neither partner wants to remain in the house and the amount required is small enough to be manageable, that may be the best option. The alternative is foreclosure, which will destroy the credit of both partners.
If one partner wants to stay in the house and continue to make the payments, the partner that leaves avoids foreclosure but will remain liable indefinitely. It may take years before the partner that remains is able to refinance in his or her own name.
Jack Guttentag is professor emeritus of finance at the Wharton School of the University of Pennsylvania.
©2014 Jack Guttentag
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