For most Texas couples, the family home is the single largest community asset and the single largest community liability. When divorce arrives, the question isn’t just who gets the house; it’s what happens to the mortgage. The two are inseparable, and navigating this properly protects both spouses’ credit, financial stability, and legal obligations long after the divorce decree is signed.
In Houston, Katy, Sugar Land, The Woodlands, Cypress, and Spring, rising property values over the past decade have meant that many divorcing couples are sitting on substantial equity and substantial debt. Here’s what you need to understand about handling mortgaged property in a Texas divorce.
The Critical Reality: The Decree Doesn’t Bind the Lender
This is the single most important concept for divorcing homeowners to understand. A divorce decree can say whatever the parties or the court decides about who is responsible for the mortgage. But the lender was not a party to that divorce, does not care what the decree says, and is fully entitled to hold both spouses legally responsible for the debt they jointly signed regardless of the divorce decree’s terms.
If both names are on the mortgage and one spouse is ordered by the decree to make payments, but fails to do so, the lender can and will report the default to both spouses’ credit bureaus, initiate foreclosure against the property, and pursue a deficiency judgment against both parties. The spouse who didn’t get the house—who thought they were protected by the decree has their credit destroyed through no fault of their own.
The only ways to actually remove a spouse from mortgage liability are: (1) selling the property, paying off the mortgage, and dividing the proceeds; (2) the spouse keeping the property refinancing in their name alone; or (3) a loan assumption, in which the keeping spouse formally assumes the mortgage with lender approval.
Option 1: Selling the Property
Selling is often the cleanest resolution for mortgaged property in divorce. The property is listed, sold, the mortgage is paid off from proceeds, and net equity is divided between the parties. Both spouses are simultaneously removed from the mortgage, and no ongoing financial entanglement remains.
The practical challenges involve the timing and management of the sale during divorce proceedings. Who maintains the home, makes mortgage payments, and handles repairs and showings? These should be addressed in temporary orders early in the case. The parties also need to agree on the listing price, the real estate agent, and how to handle situations where the market value doesn’t cover the mortgage balance (a potential short sale).
Option 2: Refinancing
When one spouse wants to keep the home and has sufficient income and creditworthiness to qualify for a new mortgage in their name alone, refinancing is the most common solution. The refinance pays off the joint mortgage and replaces it with a new loan solely in the name of the spouse keeping the property. The other spouse is simultaneously released from mortgage liability.
The challenge in today’s rate environment is significant. Average mortgage rates jumped from historically low levels (around 3.5 percent in early 2022) to over 6.5-7 percent by 2024. A spouse who bought a home at a 3 percent rate now faces refinancing at more than double that rate, dramatically increasing monthly payments. For some spouses, this makes refinancing financially unworkable on their post-divorce income. This is a real practical constraint that affects what’s achievable in settlement negotiations.
Texas has specific rules about Owelty liens and the use of home equity that apply when one spouse is buying out the other’s equity interest through a refinance. Texas family law attorneys and divorce lending specialists work together to structure these transactions within Texas’s home equity lending framework.
Option 3: Mortgage Assumption
Some existing mortgages can be assumed by one spouse meaning that spouse formally takes over the loan with the lender’s approval, at the existing rate and terms. Government-backed loans (FHA, VA, USDA) are generally assumable, subject to credit qualification. Conventional loans are generally not assumable, though lenders have some discretion.
A mortgage assumption preserves the existing interest rate which in today’s environment, where many homeowners have locked-in rates well below current market rates, can be highly valuable. The Garn-St. Germain Depository Institutions Act of 1982 prevents lenders from invoking a due-on-sale clause when property is transferred incident to divorce, which facilitates assumptions. However, the assuming spouse must still qualify on their own income and creditworthiness.
Courts often use a Deed of Trust to Secure Assumption as a protective mechanism. The spouse keeping the home signs this deed, confirming their obligation to make payments and giving the departing spouse the right to foreclose on the property if payments stop protecting the departing spouse’s credit.
Handling Underwater Properties
In rare situations, a property may be ‘underwater’; the outstanding mortgage balance exceeds the current market value. This creates a different problem: there’s no equity to divide, only a loss to allocate. Options include a short sale (with lender approval to accept less than the full payoff), continuing to make payments jointly until values recover, or negotiating which spouse absorbs the deficiency.
Underwater properties were more common after 2008, and while Houston’s market has generally been strong, localized downturns can create underwater situations. These require direct lender negotiation alongside the divorce proceedings.
Legal Disclaimer: This article is for general informational purposes only and does not constitute legal advice. Every divorce case is unique, and laws change frequently. The information here may not apply to your specific situation. For advice tailored to your circumstances, consult a licensed Texas family law attorney. Reading this article or contacting Anunobi Law does not create an attorney-client relationship.