Unwinding partnerships: When one party wants out of a mortgage

by Jason Porterfield

The benefits of teaming up with friends, family members and significant others in order to purchase a property are obvious. Having another buyer involved increases the amount clients can spend on a home. Together, they may be able to buy a larger home than either could afford separately. For some buyers, it might be the only path to homeownership.

However, homebuyers who form such partnerships should acknowledge the risks from the start, whether it’s the possibility of partners falling out, someone dying or one party having financial trouble and needing a way out of the mortgage.

“Even though the partnership or the friendship or the relationship – whatever it is – may have dissolved, they have entered into a legal obligation jointly,” said Chad Steadham, senior lending manager at JP Morgan Chase & Co. in Houston. “Quitclaim deeds are not recognized in Texas. Even if you’re talking about a warranty deed, even if they tried to remove themselves from the ownership, they’re still responsible for the obligation because they signed on. They’re on the promissory note. They’re going to be responsible for the repayment regardless of what occurs.”

According to Steadham, the only way to dissolve such a partnership would be for one party to buy the other’s share or for them to sell it together and divide the proceeds. That process is somewhat simple if one party has the financial strength to buy the other’s share with a cash payment. If not, he or she has to qualify to borrow more money.

“If there’s an obligation, they would have to be able to purchase the other individual out and still qualify for the loan individually,” Steadham said. “If we were in this scenario, purchasing a home together and you wanted to retain the property, and there was a falling out, then you would have to purchase my interest. That means I would have to sign off and we’d have to come to an agreement on what the sales price would be or what my share of the equity would be. And then you would be able to go out there and finance to undertake paying off the existing mortgage and then paying my portion off that would be owed to me.”

Avoiding such situations requires up-front planning that establishes a process for unwinding the mortgage and includes details such as the size of each purchaser’s share. Otherwise, the situation could become more complicated if heirs or other parties become involved.

“Say that three individuals were going in together, and then somebody unfortunately passes away,” Steadham said. “Now you have the issue of how the individual that is now deceased put the property in their will, who the beneficiaries are, who the heirs of that property would be. Now you have a potential unintended consequence where, say, one individual had multiple children that they left it to. Now that 33 percent ownership is split up between three other individuals. It just creates a lot of complexity.”

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