What Happens To A Joint Home Loan After Divorce?
Going through a divorce is a painful process on the personal front. And it becomes all the more complicated for a couple if they have taken a joint home loan. So, it is better to keep in mind the likely financial consequences in case of a divorce.
MakaanIQ explains how a divorce affects the debt that you took jointly with your spouse.
While a divorce mostly causes division of assets, it would also demand division of liabilities if you have taken a home loan. There are two possibilities if the spouses have their home loan running jointly:
- Both agree to sell the house
- One of them gets the loan transferred in his/her name and is solely responsible for making the loan payments.
Divorce from a lender's angle
You are fully responsible for the debt from a lender's perspective if a loan is in your name, whether as the main applicant or a co-applicant. If your former spouse, who has agreed to handle the debt, defaults in future, you will be responsible for the payments and late fees, etc. In simple terms, the loan contract does not get affected by the terms & conditions of the divorce agreement. Any change of name, address or even notifying the lenders about the divorce cannot make you escape your debt responsibility.
A look at the likely steps you can take in a situation like that:
Get your name off the loan
While separating yourself from shared loans could be a good option for you, your lender may not be willing to allow this. Remember that the loan was granted on the basis of the combined credibility of you and your former spouse. So, the lender might want to review the repaying capacity of the other borrower before removing your name from the loan.
Keep the house and refinance the mortgage
If you want to keep the house, you would most probably have to buy out your spouse's share by paying an amount which is more or equal to the amount of his/her interest in the house. For instance, your former husband and you have a house worth Rs 50 lakh, and have the outstanding mortgage running on it for Rs 30 lakh. In the given situation, the equity in the house is Rs 20 lakh. Now, if the asset is split 50-50, each will have the equity or interest worth Rs 10 lakh in the house. If you want to keep the house after divorce, you will have to pay your former spouse the 50 per cent (it can even be more) of his or her interest or equity in the house; that is Rs 10 lakh. The amount can be more, too, depending on the mutual divorce agreement.
It is important for one to ascertain the right amount of one's equity in the asset to opt for this step. After the buyout, one can re-finance; that is, take a new home loan.
Clear your debt
Another option is to pay off your debt. A lender is never interested in who gets the ownership of the property; all it wants are the regular payments for the loan. So, one can always sell the house and liquidate other assets to repay the debt. You need to know the difference between the co-borrowed loan and the co-owned property, as the asset will go to the person in whose name the property is registered.