Question: I have a question regarding removing myself from a mortgage. I own a home with an acquaintance and now we have parted ways. Since I no longer live at the house I would like to get my name off this mortgage prior to purchasing another home. My friend feels there is no rush to get this refinanced and pay me out my share of the equity in the home. Is there any way of “forcing” a person to refinance a home? I don’t want the liability of this home in case something happens there since I am no longer involved with it. Any thoughts are appreciated.
H.A., Everett
Answer: Your situation highlights the risks inherent in two unmarried people buying a house together. You have essentially entered into a real estate partnership, and as I’ve said before in this column, it is sad but true that most partnerships end badly. The partners usually start out with a common goal but over time their goals often change. For example, one partner might want to hold the property for long-term investment while the other wants to sell; or tension builds between the partners because one partner feels he or she is carrying a disproportionate share of the financial costs and/or property management burden. Conflict is almost inevitable, and the break-up is rarely amicable.
The smart way to handle this kind of transaction is to draw up a very detailed partnership agreement before you purchase a home. This agreement should anticipate every conceivable problem or disagreement that might come up during your ownership of the property and spell out exactly what you will do in each and every circumstance.
For example, you could have drawn up a contract that included a clause stating that if either one of you ever wanted to move out, the remaining party must buy out the other party’s equity within 60 days or the property would be put up for sale. The advantage of drawing up such a contract in advance is that you have a chance to calmly and rationally work out problems before tempers flare.
Unfortunately, you don’t have any leverage now because there is apparently no property ownership agreement in place. Therefore you can’t force your friend to refinance and pay you off. You will have to hope you can reach an amicable settlement with your friend. You could draw up a private contract selling your interest in the home to your friend with your friend immediately assuming 100 percent of the liability for the mortgage payments and agreeing to pay you for your equity within a certain period of time, such as six months or one year, or any other period upon which you could agree. You would record a quit-claim deed transferring your ownership interest to your friend. Then, when you apply for a mortgage to buy a new home, you could show the lender a copy of your sales contract and obtain copies of the cancelled checks showing that your friend is making the mortgage payments on your old home. Many lenders would accept that as sufficient documentation to remove the mortgage payments from your debt-to-income ratio for purposes of calculating your eligibility for a new loan.
So if you draw up a sales contract, be sure to include a clause that requires your friend to provide you with copies of cancelled checks upon request to prove that he or she is making the mortgage payments.
Please be aware that such a sales contract and quit-claim deed would not relieve you of liability for the mortgage payments as far as your previous lender is considered. The quit-claim deed does not remove your name from the mortgage documents and that loan will continue to show up on your credit report until it has been paid off. So if your friend fails to make the mortgage payments on time, your credit rating will be seriously damaged. Therefore, you would need to determine whether you can trust your friend to follow through before you quit claim the property over, because once that document is recorded you lose your ownership interest in the property even though you are still legally responsible for the mortgage! That puts you in a very dangerous financial position.
The safest way to solve your problem is to wait for your friend to refinance the loan or sell the home. That may delay your home purchase plans but it is much less risky than using the private contract method described above.
Mail your real estate questions to Steve Tytler, The Herald, P.O. Box, Everett, WA 98206, or e-mail him at economy@heraldnet.com.
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