Posted on March 20, 2022

Refinancing A Mortgage In An Illinois Divorce

When you marry someone, you make a promise to them that will last years and years. When you take out a mortgage, you also make a promise that will last years and years. Extracting yourself from the obligations of a mortgage often goes hand in hand with extracting yourself from a marriage through a divorce. How can you refinance your marital home during an Illinois divorce?

The Options For A Mortgage During And After An Illinois Divorce

A mortgage “a document in which the owner pledges his/her/its title to real property to a lender as security for a loan described in a promissory note.” Black’s Law Dictionary (10th ed. 2014)

A mortgage should be distinguished from a deed which assigns the actual ownership of the land.

A deed is “the written document which transfers title (ownership) or an interest in real property to another person.” Black’s Law Dictionary (10th ed. 2014)

In a divorce, a mortgage will often be in one or both parties’ names. Likewise, a deed will often be in one or both parties’ names.

If the mortgage is in one party’s name and the deed is also in their name, the property may be awarded to that party in the Marital Settlement Agreement without the need to refinance the mortgage or transfer the deed.

If the mortgage is in one party’s name and the deed is in both parties name, the mortgage may remain in the party’s name while the other party signs a quit claim deed transferring their interest in the property.

“A quit claim deed conveys only the grantor’s interests in the property described therein” Hulke v. International Mfg. Co., 142 NE 2d 717 – Ill: Appellate Court, 2nd Dist. 1957

Again, the mortgage may remain the obligation of the party solely on the mortgage without the need for refinancing the mortgage.

If the mortgage is in both parties’ names, both parties will have an ongoing obligation to the lender. One party must be extricated from the mortgage and this can only be done via sale of the property (and subsequent satisfaction of the mortage) or by refinancing the mortgage in the name of the party who will keep the property.

A mortgage in both parties names even when the deed is only in one party’s name will turn the property into marital property. If a “[party] assumed an obligation under the new mortgage…[t]he marital residence should [be] classified as marital property.” Zito v. Zito, 554 NE 2d 541 – Ill: Appellate Court, 1st Dist. 1990

Refinancing A Mortgage During A Divorce

When the refinancing or sale of a house is inevitable, either party may petition their divorce court for an order requiring the sale or refinancing of the house.

“Either party may petition or move for…other appropriate temporary relief including, in the discretion of the court, ordering the purchase or sale of assets and requiring that a party or parties borrow funds in the appropriate circumstances.” 750 ILCS 5/501(a)(3)

The party who is refinance the mortgage in their name alone will receive an approval letter indicating that the balance of the mortgage MAY be lent to them. This approval letter does not automatically transfer the mortgage and property to one party’s name. But, the approval letter does imply that the one party who wants to keep the house can successfully refinance the house in their name alone.

If a party can refinance the marital home and their intention is to refinance the marital home, the court will consider this refinancing when the court allocates the assets of the parties in an Illinois divorce.

An Illinois court can “divide the marital property without regard to marital misconduct in just proportions considering all relevant factors, including:

[T]he relevant economic circumstances of each spouse when the division of property is to become effective, including the desirability of awarding the family home, or the right to live therein for reasonable periods, to the spouse having the primary residence of the children” 750 ILCS 5/503(d)(5)

This may mean that one party gets the vast majority of the marital assets because they will be awarded the largest marital asset: the marital home.

An imbalanced property division is allowed in an Illinois divorce.

“The [Marriage and Dissolution of Marriage] Act does not require an equal division of marital property, but an equitable division” In re Marriage of Jones, 543 NE 2d 119 – Ill: Appellate Court, 1st Dist. 1989

But, most attempts at mortgage refinance allow a party to refinance the full value of the home which may be in excess of the current mortgage. This would mean that there would be additional money available through the refinance wherein the party refinancing the mortgage could “buy the other party out.”

This excess money, if available, can be awarded to the other spouse as their equitable share of the marital property.

This appropriate amount for a spouse to “buy out” the other spouse’s interest in the house is usually determined by an appraisal of the house…which is part of the refinancing process.

When attempting to refinance the house, the lender must be sure that the security for the loan, the property, has a value of at least the mortgage value. To do so, the lender will appraise the house and arrive at a fair market value of the house. That fair market value, if in excess of the mortgage will be the presumed equity of the house which could then be divided by an Illinois divorce court.

“In determining the value of assets or property under this Section, the court shall employ a fair market value standard. The date of valuation for the purposes of division of assets shall be the date of trial or such other date as agreed by the parties or ordered by the court, within its discretion.” 750 ILCS 5/503(k)

For example, a house with a $ 200,000 mortgage gets refinanced and during the refinancing process, an appraisal reveals that the property is worth $ 300,000. Therefore, there is $ 100,000 of marital value for the court to divide. The court could order that the party refinancing seek a $ 250,000 mortgage: $ 200,000 to extinguish the old mortgage and $ 50,000 to “buy out” the other party’s marital share.

Often this transfer cannot occur during the divorce process because the lender will ask “are you getting a divorce” and if you answer honestly the lender will be hesitant to finalize the mortgage refinancing because there are too many variables that haven’t been finalized: maintenance, child support and the division of other assets.

But, the parties to an Illinois divorce can contract for the eventual refinancing of the mortgage in their Marital Settlement Agreement.

Refinancing A Mortgage After An Illinois Divorce

The parties to an Illinois divorce usually outline how a property will be refinanced in their Marital Settlement Agreement. The language awarding the property and requiring refinancing of an existing mortgage will read as follows:

“Upon entry of the Judgment for Dissolution of Marriage, WILMA will be awarded the Bedrock Property as her sole and separate property with no claim from FRED. Within one (1) year of the entry of the Judgment for Dissolution of Marriage, WILMA shall refinance the Bedrock Property and remove FRED’s name from the property. FRED shall cooperate with the refinancing process and shall quitclaim this property to WILMA at the appropriate time during said refinancing process.”

During this window where the refinance must happen the party awarded the property will usually be responsible for the expenses of the property including the ongoing mortgage payments…because the property is theirs now in contemplation of a refinancing that would finally extricate the other party from all obligations to the property. Language in the Marital Settlement Agreement will read as follows:

“WILMA shall be responsible for all costs, liabilities, and expenses associated with the Bedrock Property and WILMA shall be responsible for all the payment of the same, which includes the monthly mortgage, property taxes, utilities, etc. WILMA shall indemnify and hold FRED harmless for payment of the same, and accordingly, FRED will not be responsible for paying any cost related to the Bedrock Property.”

If the party trying to refinance the property is unable to refinance the property within the proscribed period, the Marital Settlement Agreement will require the property to be sold and the proceeds distributed.

“Failure of WILMA to refinance the Bedrock Property within one (1) year of the entry of the Judgment of Dissolution of Marriage will require the parties to list the property immediate sale and cooperate with all reasonable offers on the Bedrock Property. Any proceeds from the sale of the Bedrock Property will then be divided equally between the properties.”

This required sale is necessary because a party cannot be obligated to a mortgage beyond what is reasonably necessary. The other party not enjoying the use of the property will still have their credit tied to that mortgage.

A party will only be allowed to keep a property without refinancing that property if the other party agrees to be indemnified for the responsibility for the mortgage.

The problem is, that if the party that keeps the house stops paying the mortgage, the lender will foreclose on BOTH parties affecting BOTH parties’ credit and possibly pursuing a subsequent judgment on the spouse who wasn’t awarded the house. So, there is little, if any, chance that a spouse will accept indemnification.

The only way a spouse would accept indemnification is if it was the only way to conceivably keep their children in the same school district until graduation. Even then, the spouse not awarded the marital home would want to be rewarded for their adoption of the post-divorce risk of foreclosure.

There is no law for how two ex-spouses must hold property together post-divorce. Everything is negotiable and the terms of the contract between two ex-spouses will apply.

“Terms of the agreement set forth in the judgment are enforceable by all remedies available for enforcement of a judgment, including contempt, and are enforceable as contract terms.” 750 ILCS 5/502(e) 

An indemnified spouse may request that the house be sold after the graduation of the children and that the proceeds be divided at that point when they are presumably higher. The indemnifying spouse may subsequently request a credit for any reduction in the mortgage balance and (also optional) interest payments made during their exclusive responsibility for the mortgage.

What If A Spouse Does Not Refinance A Mortgage As Ordered?

A former spouse may promise in their Marital Settlement Agreement to eventually refinance a property they are awarded so that the other spouse no longer has the mortgage associated with their name and, thereby, be able to get their own house and associated mortgage.

The former spouse’s financial situation and credit may not let them refinance the mortgage, however.

In such a case, what can a court do to enforce the refinancing of the home? Not much.

The spouse who wants to be off the mortgage can ask that the other spouse be held in contempt. Every contempt order must include a “purge provision.”

“A valid contempt order must contain a purge provision, which lifts the sanction when the contemnor complies with the order. A civil contempt order that fails to provide the contemnor with the “keys to his cell” is void.” Bank of America, NA v. Freed, 971 NE 2d 1087 – Ill: Appellate Court, 1st Dist., 2nd Div. 2012 (citations omitted)

If the purge is to refinance the mortgage and the mortgage company refuses to cooperate (for whatever reason), the purge is invalid and the party cannot be held in contempt.

If the “mandates of the purge provision were unachievable…an unachievable purge provision is a nullity.” IN RE MARRIAGE OF MENCKOWSKI AND MENCKOWSKI, 2021 IL App (5th) 170260 – Ill: Appellate Court, 5th Dist. 2021 (Rule 23)

In reality, the divorce lawyers rarely see what happens in the refinancing process. It usually goes quite smoothly without us as the mortgage refinancing company approves the loan, values the house and takes the other spouse off the house. If, however, you anticipate refinancing your marital home to be a problem in your divorce, don’t hesitate to contact my Chicago, Illinois family law firm to speak with an experienced Chicago divorce attorney.

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Russell Knight

Russell D. Knight has been practicing family law as a Chicago divorce lawyer since 2006. Russell D. Knight amicably resolves tough cases while remaining a strong advocate for his client’s interests.

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