It is important to know the ramifications of what can happen when a name on a house title is not on mortgage loan. Understanding the roles and responsibilities for all parties involved can help to avoid future conflict and confusion.
Possible Instances: Different Names on Title and Mortgage
There are several reasons why a name on the house title might not coincide with the name on the mortgage loan. Examples include:
- One of the buyers from a couple has bad credit or a recent bankruptcy or foreclosure, affecting his or her ability to qualify for a mortgage or causing a higher interest rate.
- One of the homeowners is unemployed or doesn't have enough job history to qualify for a mortgage.
- Parents want their adult children to have full rights to the home once they pass away without having to avoid go through probate.
If putting someone on the title to the house but not on the mortgage is an arrangement that you are considering, it is very important to agree on ownership and responsibility of the home in a will or legal contract. Everyone listed on the title has ownership rights to the house and can use, possess, or transfer ownership of the property. When a person obtains a mortgage, the relationship exists only between the borrower and the bank, and that person signs a promissory note to pay back the bank for the loan. This does not mean that no one else can claim ownership to the property. There are a number of important legal considerations to keep in mind for situations where a homeowner's name might be on the title but not the mortgage loan.
Leaving a person's name off the mortgage does technically exclude him or her from financial responsibility for the loan. However, it is important to note that the bank can seek payment from any owners if the home faces foreclosure. Though it will not affect your credit if you are not a borrower on the mortgage, the bank may still seize the property if loan payments are not made. This is because the bank holds a lien against the home's title.
In other words, if you want to remain living in the house, you'll have to keep making those mortgage payments if the person on the mortgage fails to do so, even if you aren't obligated on the mortgage promissory note. Otherwise, the bank can foreclose on the house. If you become the sole person responsible for making payments in the future, you can refinance the house in your name.
Selling Ownership Interest
Because the people who are listed on the title have full ownership of the home, they have full rights to sell the property, even if they are not on the mortgage. Though they cannot sell the property without the consent of other owners, depending on how title is held, they may be able to sell their rights to the property. This could leave you owning a home with someone you don't know. Only enter into a title agreement with someone you know and trust.
Issues With Taxes
If your name is not on the mortgage, you cannot deduct any payments you make toward the mortgage on your personal income taxes. Generally, mortgage interest is tax deductible; this is one of the major benefits of a mortgage as a type of financing. However, in order for you to deduct payments towards mortgage interest on your income taxes, you must be legally responsible for making the mortgage payments - which means your name needs to be on the loan.
Of course, if you are married to the other individual on the mortgage and filing jointly, the deduction will come off your joint tax liability. So, this is more of an issue when two unmarried people buy a house together.
Ask for Help
Whenever there is an issue with title and mortgage, or if you have questions about when a name is on the house title and not on a mortgage loan, it is very important to consult with a real estate attorney. Depending on the applicable situation, an attorney can help with determining who is responsible for the mortgage and whether or not the person listed on the house title has any legal weight in court if a battle over the home should ensue.