Co-owning a home can be a practical solution to rising housing costs, but when circumstances change and you want to sell your partial interest in the property, it raises the question: should you agree to stay on the mortgage or should you be removed from the mortgage? This decision requires careful consideration of several factors by a partition lawyer to ensure your financial and legal interests are protected.
Current Mortgage May Prevent You From Qualifying for Your Next Home
Most importantly, when you apply for a mortgage, the lender will likely include the balance on the current mortgage as your existing debt in computing the debt-to-income ratio in qualifying for a new mortgage. This may make it difficult, if not impossible, to buy a house of your own. Since most mortgages are 30 year loans, and most co-owners have decades ahead of them on the mortgage when they split up, this may mean decades of a slowly declining balance on your credit report that may prevent you from building equity in a house of your own.
Financial Implications on Your Credit Score
Staying on the mortgage means you remain financially responsible for the loan, even if you’re no longer living in or co-owning the property. If your co-owner or former co-owner defaults, your credit score could be negatively impacted, and you might be pursued for the remaining debt. Conversely, removing yourself from the mortgage can protect your credit but might be challenging without selling the property or refinancing the loan.
Get Paid Your Equity
The end of a co-ownership relationship generally involves a buyout of the equity of the co-owner who is leaving. This means the co-owner selling their interest in the property should determine the value of the property, deduct the remaining mortgage balance, and likely the cost of sale, to determine the total equity in the property. Then, multiply this by their percentage ownership. In many cases, partition offsets, meaning unequal payments, may also increase or decrease what is owed to each co-owner. There is nothing about agreeing to stay on the mortgage after the sale to the co-owner that should cause the selling co-owner to receive less than they are owed.
Get Paid for Borrowing Your Credit
While a partition action will force the sale of the property, by which the court would be likely in most circumstances to require a refinance, a settlement agreement can allow the buying co-owner to keep the current mortgage in place if the selling co-owner agrees. However, with interest rates considerably higher than they were before mid-2022, there is great value to the buying co-owner to keep the previous, lower-interest mortgage in place. Perhaps the selling co-owner would agree to allow their credit to be borrowed only if they were compensated for this. For example, if current rates would cause the mortgage to be $3,000 a month higher, perhaps the selling co-owner would receive some portion of this each month as compensation for remaining on the mortgage.
Mortgage Assumptions
Another possible solution could be to assume the mortgage of your co-owner. Certain mortgages, including FHA and VA loans, may allow a buyer to assume the existing mortgage of the seller, thereby extinguishing the seller of any further liability of that debt. Mortgage assumptions in a partition action require careful considerations of a skilled partition attorney.
Legal Considerations – Structuring a Sale Without Waiving Your Rights
Legally, an arrangement to stay on the mortgage can have positive and negative consequences, depending upon how the agreement is structured.
If no agreement is structured, and one co-owner simply moves out, the remaining co-owner might claim offsets for paying the mortgage, taxes, and insurance, though Hunter vs. Schultz may limit this if the payments are less than the rental value.
If an agreement is structured, it could involve a sale of the selling co-owner’s interest. This means that a deed is recorded conveying their partial interest, presumably to the other co-owner, their family member, or new significant other. However, if the selling co-owner remains on the mortgage but has already conveyed their interest to another party, this arrangement will mean that they no longer have a right to partition since they are no longer a co-owner. The selling co-owner would then be stuck on the mortgage for years to come, even if the buying co-owner defaults on the mortgage, thereby harming the selling co-owner’s credit.
A better way to structure this arrangement might be for the selling co-owner to stay as an owner under a written agreement clearly outlining the duties of each party, including payment of expenses on the property. Critically, the agreement should specify that either party has the right to partition at any time, meaning they have not waived the right to partition. Any such agreement should be drafted by an experienced partition attorney, not by a transactional attorney who has no experience with how a partition action would be handled by a court in light of such an agreement. Beware that these agreements, if not properly drafted, can increase the cost of a partition action.
What is the Purpose of the Delayed Sale of the Property?
Staying on the mortgage is a detriment to the selling co-owner, meaning that co-owners stuck in this predicament should ask themselves why they are delaying the end of the co-ownership relationship.
One common thought process is that interest rates will go down in the future. However, this theory is pure speculation, as it could be that interest rates go up in the future. This would make a buyout through a refinance even harder.
Another common thought process is that the buying co-owner will have the ability to complete the buyout at a future time. However, such a theory should involve specific facts, such as a rising income by the buying co-owner.
Sometimes, kicking the can down the road makes the situation harder. With inflation stubbornly high in recent years, a delay in the sale may cause the amount of equity to increase. Thus, even if interest rates go down, the amount being demanded by the selling co-owner at a future date may be even higher, thereby decreasing the chance of such a buyout occurring.
Talkov Law Can Help
The bottom line is that the co-owners had a specific purpose for the property when they purchased it, perhaps to live together as a romantic couple. Once the relationship has gone south, the easiest solution is simply to sell the house.
Whether a co-owner buyout is possible or not, a partition attorney can offer specialized guidance to navigate the uncertainties of initiating a partition action in the current economy. If you are seeking tailored advice and representation, contact Talkov Law, California’s premier partition action law firm. For a free consultation, call (844) 4-TALKOV (825568) or reach out online today.
