Looking to free up cash to pay off credit card debt, tackle major home improvements, or start a new business? Homeowners can use their property to secure a lower interest rate on a loan—but married homeowners usually need to come to an agreement first.
While you can borrow a home equity loan as an individual, your spouse will need to sign off on the use of the marital residence as loan collateral. The borrower will be legally responsible for the entire debt, and the application will only be reviewed against their income and credit history.
The Role of Consent in Home Equity Loans
How can one spouse get a home equity loan as a solely owned debt? There’s just one step to add to the application and closing process: spousal consent.
Even if one spouse is the pre-marital owner of the home and the only name on the deed, lenders generally require the non-borrowing spouse to provide consent that serves to:
- Testify to their awareness of the loan
- Consent to the use of the residence as loan collateral
- Waive their interest in the pledged property
This provides the lender with the assurance that both parties understand that the property is at risk of foreclosure if the loan amount is not paid, and protects the non-borrowing spouse from unforeseen loss of their home.
Spousal consent for a loan against marital residence is gained either prior to closing with a specific form or directly on the loan documents at closing.
The Concept of Marital Residence
Marital residence is a term usually seen in divorce law; it simply refers to the home in which the married couple and their dependent children primarily reside. It does not include:
- Second homes
- Cabins or vacation homes
- Rental or investment properties
Note, spousal consent is required for loans against a marital residence only. This means that one spouse may be able to take out home equity loans against these other types of real estate without the knowledge or consent of their partner. However, if you apply for a loan against your marital residence without spousal consent, it’s likely you will incur a denied home equity loan.
Consequence of Not Obtaining Spousal Consent
So what’s to stop a married homeowner from simply not mentioning the spouse on loans for their other real estate properties?
Checking marital status is built into the lender’s process. If a home loan closes without consent, the non-borrowing spouse can take legal action against the lender.
When to Pursue a Home Equity Loan Individually
There are many reasons for couples to tackle financial tasks and identities individually, whether that’s maintaining bank accounts, paying taxes under married-filing-separately
status, or applying for a loan.
One Spouse Has Good Credit
The saying “opposites attract” is all-too-often true in terms of financial habits and histories. Married couples aren’t always on the same page when it comes to saving, spending, and repayment habits.
Plus, one spouse may have a past event such as a bankruptcy, identity theft, or medical crisis that led to a poor credit score.
Let’s say Judy has an excellent credit history and adequate income to qualify for a home equity loan. On the other hand, her husband Alex learned his current frugal habits the hard way—with a high debt load in early adulthood and a bankruptcy prior to their marriage, he’s still working to improve his poor credit score.
Even if the couple owns their home and manages current finances jointly, Judy may be able to secure a lower interest rate alone than they’d be offered as a couple.
If the home was owned prior to the marriage and contains only one spouse’s name on both the deed and existing mortgage, it can simplify ongoing ownership status to keep a home equity loan under that person as well.
For couples heading for separation or divorce, a single-borrower home equity loan in line with anticipated future residence and division of assets may be logical.
An Alternative to Home Equity Loans: The Sale-Leaseback
Before acquiring a home equity loan, consider, “Is a home equity loan a good idea for my spouse and me?” There are many pros and cons of home equity loans but if you want to free up cash without a traditional home sale-and-move, you should consider a sale-leaseback. With a sale-leaseback, you sell your home to an investor-landlord. Instead of moving, you change status to a renter with extra legal rights.
At closing, you’ll gain:
- A sale agreement that converts 100% of your home equity to cash
- A guarantee of your right to remain in your home as a renter as long as you choose
- A lease with an agreed-upon rent rate
- A lock on that rate for multiple years and a predictable formula for future rent increases
One spouse can take out and repay a home equity loan individually, but will require spousal consent if the loan is against the marital residence.
The borrower will be fully responsible for paying off the debt, but the non-borrowing spouse will be affected if the loan ends in foreclosure and they’re left without a home.
A home equity loan by one spouse can be a good idea if they can qualify for it and have better credit than their partner.
For a debt-free alternative that frees up your entire home equity, consider a sale-leaseback.
- Investopedia. Can Married Couples Have a Joint Home Equity Loan? https://www.investopedia.com/can-married-couples-have-joint-home-equity-loan-5322854
- The Nest. Can I Get a Home Equity Loan Without a Spouse’s Signature? https://budgeting.thenest.com/adding-nonworking-spouse-mortgage-29767.html