Our firm handles many cases where two or more people co-own property, and there is a dispute between the parties over whether to sell the property. These situations can be resolved in Court by bringing a partition action, as has been discussed in prior blog posts. However, our attorneys always attempt to negotiate a resolution before bringing an action in Court. Such resolutions may involve one party buying out the interests of the other, or all owners agreeing to list the property for sale, and sell the property to a third party, with the co-owners dividing the proceeds.
One important issue that often arises in these situations is where there is an outstanding mortgage on the property. Co-owners, when they buy the property, may take out a loan to cover the purchase price. In most cases, all co-owners will be signatories on the note and mortgage, meaning that they are both individually and jointly liable for the obligations under the note (which is a contract to repay the amount borrowed).
Mortgage loans are usually made with an institutional lender, such as a bank or credit union. However, what happens when one party agrees to buy the other out in a settlement of a partition action? For example, an unmarried couple purchases a house together and takes out a mortgage in the amount of $500,000.00. Both parties sign the note and mortgage and are therefore co-obligors for the loan obligations. They then split up, and one of the individuals wishes to retain the property and continue living there. Although they may agree on a “buyout price,” where the individual remaining in the house purchases the equity interest of the departing person, the mortgage and note is still outstanding as far as the bank concerned, both parties remain legally responsible for the loan, and both parties can be sued in a foreclosure action if future payments are not made.
Obviously, the party being “bought out” and leaving the property does not want to remain legally responsible for the mortgage. How can this situation be resolved? In our experience, the most common method is for the individual who is retaining ownership to refinance the existing mortgage in their own name, and, in the process, pay off the original mortgage. That removes the co-owner who is being bought out from his obligation under the mortgage at the same time that he sells his ownership interest to settle the partition action.
In order to accomplish this, the co-owner who is remaining in title must have strong credit to obtain a mortgage in her own name. This will depend on the current value of the property, the remaining balance on the existing mortgage, and the financial situation of the proposed borrower, such as their current income stream, assets, and liabilities.
If the remaining owner cannot qualify for a mortgage on her own, the remaining options become more limited. Major lending institutions generally will not “remove” a party from a note and mortgage which was duly signed. That party will remain obligated under the note and mortgage, even if he is no longer in title on the property. When a mortgage cannot be refinanced, the only way to remove the obligator(s) on the note is to sell the property to a third party, and use the funds from the purchase to pay off the existing mortgage.
Our firm has extensive experience in negotiating agreements between co-owners of property and advising as to strategies to be utilized in dealing with outstanding mortgages.