Dear Debt Adviser, Several years ago, I bought my first home. Within that time, I met someone to whom I am now engaged. My fiance is divorced. Through the process of his divorce, he took his name off the mortgage loan he had with his ex-wife, but his name is currently on the home equity loan as a co-signer. Per their divorce decree, they agreed she is responsible for payments of the equity loan. My question is: When we are married and "if" the ex-wife defaults on the loan, should I have any reason to worry about losing my house or other assets because he and I are married? -- Worried
Dear Worried, I am glad to hear you and your fiance have discussed your personal financial situations before saying "I do." In my experience, many people don't find out about real and potential financial liabilities they may be exposed to as a result of their union until after they are married. Knowing your betrothed's financial situation before you enter into a marriage contract is always the better route to take.
Yes; what you are telling me has me slightly worried. My concern is he may not actually be off the mortgage loan as he thinks. Typically, a lender won't take a person off a note just because of a divorce. The loan has to be paid off and then a new loan underwritten and issued in just the one name. Also, the divorce says his wife is responsible to pay for the equity loan, but he is still responsible if she defaults. If she does, he'll have to pay, and his credit will be damaged. Have him pull a credit report and verify he's off the mortgage loan.
As to the impact on you, in general terms, the assets and liabilities you acquired prior to marriage remain yours after the marriage unless you retitle them as joint property. So your home would be safe from any collection activity from your future husband's creditors. The only way his creditors could come after your home is if his name was on the title.
But remember: Should your intended's ex-wife default or die before paying off the equity loan, the lender would expect the other co-signer (your fiance) to pay, regardless of what is included in a divorce decree. A divorce decree does not supersede an existing contract such as an equity loan. What that means for you and your fiance is that any assets in his name only or in both your names, including joint checking accounts, after your marriage would be fair game for the equity loan lender to pursue if the ex-wife's payments aren't made on the equity loan.
The best way to dissolve joint debts in a divorce is to refinance the obligation(s) in one person's name. However, sometimes that is not a viable option and instead it is outlined in the divorce decree who is responsible for which joint debts. Because the ex-wife is named in the divorce decree as being responsible for the equity loan, she might be in contempt of court if she did not pay. But your fiance would have to go back to court to get a judge to order her to pay, and the lender would still hold your fiance responsible for payment until the debt is repaid.
I'd rather that he request his ex-wife refinance the mortgage and home equity loan into one new mortgage in her name only. If she has good credit and the income to qualify, she would probably get a better interest rate on a new mortgage loan than the current mortgage and equity loan. Should she be unwilling or unable to refinance, your fiance will need to keep a close watch on his credit reports to ensure payments on the equity loan are being made and decide what he will do if they are not. Regardless of the reason why she can't take his name off the loan, it's worth the inconvenience to ask again in the future.