Quit Claim Deed
A quitclaim deed transfers a person’s interest in a property but doesn’t automatically remove that person from the loan.
This is especially true following a divorce, separation, or other change in the family. Someone may sign their ownership rights away, thinking they are done with the property, only to discover their name remains on the loan.
The deed and the loan are two separate things.
Ownership of the property is supported by a deed. A quitclaim deed conveys a person’s interest in the property but does not include the guarantees that may be part of other deeds.
But the loan is another thing. The promissory note provides the borrower’s pledge to repay the money. The loan is secured by the mortgage or deed of trust on the property.
The easiest method to tell the difference is
The deed reads, “Who owns the property?”
The loan documents address the question, “Who owes the money?”
After Divorce: What to Expect
Say you have a divorcing couple who owns a house together. One spouse signs a quitclaim deed to give his or her interest to the other spouse, generally as part of the divorce settlement.
The deed may just list the surviving spouse. But if both husband and wife signed the original loan documentation, they could both be responsible for the mortgage. The divorce decision may require one spouse to make the payments or to refinance the debt, but the lender was usually not a party to the divorce action. The agreement between the spouses does not immediately change the lender’s rights. If the loan is not refinanced or properly assumed, or the lender does not formally release one of the borrowers, the original borrowers may still be liable for the obligation.
Why This Is Important
The mortgage may still appear on the credit report of the spouse that no longer lives in the home. If the spouse that who lives in the house doesn’t make the payments, it might harm the credit of everyone on the loan.
Removing Someone Off a Mortgage
A quitclaim deed will not suffice. The parties may want to consider one of the following options:
Refinancing
The homeowner may refinance the mortgage exclusively in his or her name. The new loan will pay off the current mortgage. The borrower still has to qualify for the new loan based on income, credit, debts, and the value of the property.
Transferring a Loan
Sometimes another qualified borrower can step in and take over the debt. However, allowing someone else to take over the loan does not automatically relieve the original borrower of liability. The lender should offer the departing borrower a written notice that the assumption is accepted and that they are no longer accountable.
Sell your home
The owners may want to sell the property. If the sale brings in enough money to pay off the mortgage, the loan is paid off at closing, and the borrowers are free of that burden.
Disclaimer of Liability
Sometimes a lender will release a borrower without doing a full refinance. This will depend on the lender, loan type, and the remaining financial qualifications of the borrower.
Each release shall be in writing. Being told someone is “off the mortgage” isn’t sufficient enough.
What must real estate professionals explain?
Real estate agents are able to explain the basic distinction between a deed and a loan, but they should not give legal advice.
They should remind the parties of:
A deed transfers title.
A loan is not released by a deed.
Discuss assumption, release, or refinancing criteria with the mortgage servicer.
Each party shall seek advice from the necessary legal, tax, and financial advisers.
Obtain any release of liability on the loan in writing.
*Note that taking off the title does not equal taking off the mortgage debt. All parties should know what will happen to the title and the debt before the transfer of ownership. The deed, divorce or settlement papers, and lender’s obligations should agree and not dispute with each other.
