I frequently hear from clients and prospective clients telling me that they have “rearranged” their financial affairs through the use of so-called “quitclaim deeds” or other contractual mechanisms by which title to property–and by extension–liability for a mortgage, is transferred. The most common appearance of this tends to be in the marital dissolution and property settlement context, where two divorcing spouses have divided the marital assets by “giving” property to each other, and one or the other has “assumed” liability for the mortgage. In concept this is a great idea. In reality, however, if there is a mortgage, it’s not all that useful. In fact, it is usually pointless.
This is simply because the lender’s rights are fixed as of the time of execution of the loan documentation, and the borrower can’t get out from under a repayment obligation simply by deeding the property to someone else. I won’t bore you with the legal language that is usually contained in the deed of trust, but suffice to say that, once on a loan, always on a loan until the loan is repaid or the lender specifically releases the borrower from the liability. Further, as a general legal principle, the loan obligation follows the property no matter who is on title.
An example might be in the case where the family owns two houses, a primary residence and a rental property, both of which are subject to mortgages, and both of which have both spouses’ names on title. When they divorce, the husband takes one and the wife takes the other as part of the marital property settlement. That’s great as long as the mortgages are being repaid. But if one of the parties gets into financial trouble, it will not be possible to inoculate the other from the consequences of a bankruptcy or default, because both parties are on the loans. Once on a loan, always on a loan until the loan is repaid or the lender specifically releases the borrower from the liability.
Of course this doesn’t mean that there aren’t solutions, but the quitclaim deed and assignment without the lenders’ consent are not real solutions.