Divorcing with a mortgage is a solvable challenge
Divorces are anything but simple, and complicating the process are decisions about what to do with the marital home and its existing mortgage.
There are time-tested options for couples experiencing divorce that may help both parties decide on the best course of action.
These options depend on factors such as the amount of equity in the spousal home, how it was purchased and titled, whether one person wants to remain in the home, divorce settlement, and the credit scores of everyone involved.
Regardless of the complexity, almost any situation can be remedied with one of the options below.
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Refinance the current mortgage
The cleanest solution could be to refinance the existing mortgage and leave only one spouse’s name on the loan.
After the refinance closes, only the person’s name who is on the mortgage would be responsible for making the monthly payments.
You could then take the name of the person who won’t be making the mortgage payments off the title of the home.
If necessary, use a cash-out refinance to pay out the portion of equity due the departing individual.
Refinancing into a new mortgage could be the simplest solution, but it only works if certain conditions apply. There are at least a few issues that can stop you from completing a refinance.
If you do not have the income to pay the mortgage on your own, then you could find that the mortgage lender will not approve the new loan for a single-income household. Unless you can increase your income quickly, you may have to sell the marital home.
If your credit scores have fallen since you took out your current mortgage loan, you may no longer qualify for a refinance. You may be able to overcome a low credit score with a rapid rescore, but success using that method is far from certain.
Often, the only “fix” for a low credit score is to rebuild credit history over a long period of time.
If you recently purchased or bought when the value of your home was higher, the spousal home may not have enough equity to refinance.
For instance, if you have built only a few percent in equity, a refinance could be cost-prohibitive or altogether unavailable. Fortunately there are mortgage options that can help you deal with a lack of home equity.
Remove an ex-spouse from the mortgage if you have low home equity
Certain refinance types allow you to remove a spouse’s name from the original mortgage, despite the home’s low equity position.
A standard, conventional refinance allows you to remove your ex-spouse’s name from the mortgage as long as you can qualify for the new loan on your own.
That means meeting credit score minimums, which usually start at 620, as well as minimum equity requirements.
Luckily, you don’t need a lot of home equity for a conventional refinance loan.
Many homeowners can refinance with just 3% equity in the house. And with home values rising quickly nationwide, that shouldn’t be a stretch — even if you just bought the property recently.
FHA Streamline Refinance
If you purchased or last refinanced your home with an FHA loan, you are permitted to refinance to remove a borrower.
However, the remaining spouse must show that they have been making the entire mortgage payment for the past six months. A Streamline Refinance is best for those who have been separated for at least this long.
But it is not ideal if your settlement agreement requires you to resolve your divorce mortgage situation right away.
Learn more about the FHA Streamline Refinance here.
VA refinance loans during divorce
Qualifying borrowers can use a VA Streamline Refinance to remove a spouse’s name from the current mortgage after a divorce. Typically, the veteran must remain on the home loan.
If the departing individual is the veteran, the remaining spouse would have to refinance into another loan type.
However, if the remaining spouse is eligible for a VA loan, they may opt for a VA cash-out loan. This option allows homeowners to take out a new loan of up to 100%of their home’s current value.
This feature could enable the remaining spouse to pay out the departing partner’s equity in the home according to the divorce decree.
There is no shortage of refinance options in a divorce mortgage scenario. But if you can’t refinance into a new mortgage, for whatever reason, then you’ll need to find another solution.
Buy out the spouse’s share of the home equity
In many states, the court will split the built-up equity in the home between the two divorcing partners.
There are a number of tools you can employ to raise cash to “buy out” the ex-spouse so you can keep the home.
If there’s equity in the home, consider a home equity loan. You won’t have to refinance the first mortgage. It’s simply a second mortgage added to the existing home loan. Closing costs are low and these loans are faster and easier to get than a primary mortgage.
Another option is a cash-out refinance, which allows you to cash out the ex-spouses home equity while also refinancing your primary mortgage — potentially into a lower interest rate. This could be a good option if you stand to benefit from a refinance and need cash-back.
Sell the home
Selling the home is another option. You and your spouse would agree to place the home on the market and then split the profits when it sells.
You would still need to determine how mortgage payments are handled before the sale closes, but this is a short-term rather than a long-term challenge.
Again, though, this solution might not work in a divorce case.
Maybe you and your spouse have children, and you don’t want to force them to move out of the home in which they’ve grown up. Or, the real estate market in your area isn’t ideal, and you’re afraid you’ll lose money if you sell.
Equity is important when selling. It typically costs between 7% to 10% of your home’s value to sell. This total consists of agent fees, taxes, title insurance, and other closing costs.
In other words, you may have to sell a home for $220,000 to break even if you owe $200,000.
Otherwise you might need to come in with a check at closing of the sale.
If you can’t sell your home or refinance your mortgage loan, there is one more option. But it is not without risks.
Keep the home and mortgage
If you’re not willing or able to sell or refinance the marital home, your other choice is to keep the home and the mortgage intact.
Both parties remain on the existing loan and liable for the payment.
This requires specific language in the divorce agreement about who will make the mortgage payments each month. Maybe your agreement will state that your former partner will pay the mortgage, even though you and your children will be the ones living in the home.
The divorce settlement might state that you and your ex-spouse will pay half of the mortgage each month.
Risk to future home loan eligibility
Keep in mind that leaving the non-resident’s name on the mortgage may impact their ability to buy a new home in the future.
A borrower’s debt-to-income ratio (DTI) is crucial when qualifying for a mortgage. When a potential home buyer is listed on another mortgage, that debt appears in their DTI and could affect the new loan application.
Risk of missed payments
Furthermore, this situation can lead to missed mortgage payments if your former partner won’t or can’t abide by the divorce decree.
Say your former spouse is supposed to pay the mortgage each month, but your name remains on the loan. If your former partner misses a payment, your three-digit FICO score on your credit report could fall by as much as 100 points.
When your name remains on the loan, your mortgage lender considers you equally responsible for making the payments each month.
Your mortgage holder will not dismiss late payments, even when your divorce attorney has negotiated your ex-spouse’s responsibility in the settlement agreement.
For this reason, a shared mortgage after a divorce might only work well in amicable divorces.
Whatever you decide, protect your credit rating
You can take certain steps to protect yourself.
The divorce papers could state that your former spouse will live in the home and apply for a refinance at a certain point. When the refinance is complete, it will remove your spouse’s name from the mortgage.
Your divorce settlement might state that your ex-spouse will keep making the mortgage payments until the refinance officially closes, and you are no longer responsible for the mortgage.
You might provide additional protection for yourself by requesting a divorce attorney insert a clause in your settlement agreement. It would say that if your ex-spouse doesn’t close the refinance during a certain period, the spousal home that you once lived in will be put up for sale.
Remember, though, that no matter what your divorce papers say, you can never fully protect yourself from the actions of your former partner when a mortgage is involved. Even if the divorce settlement includes penalties, there is no guarantee that your ex will keep making those payments.
Divorcing couples who want the safest option for all parties may want to sell the home or refinance the mortgage.
‘Divorce mortgage’ FAQ
If one partner wants to remain in the home as their primary residence, but doesn’t qualify for a refinance, they may want to pursue financial assistance such as alimony or child support (when children are involved). Although, this type of arrangement can be risky. When an ex-spouse doesn’t make the agreed alimony payments or child support payments, the mortgage holder or custodial parent is still responsible for making the monthly mortgage payments.
Even if you and your partner come to an amicable agreement, most mortgage holders will require origination of a new loan. That usually means refinancing so that the new mortgage is legally in only one person’s name.
A quitclaim deed allows you to remove a person’s name from a deed by transferring ownership from one party to another. This property transfer is also called a quick claim deed because it’s generally a fast and easy method. However, any type of deed transfer only affects ownership — it does not impact the actual mortgage loan when property is not owned. If one spouse agrees to quitclaim the marital home to the other, neither of the spouses’ names will be removed from the original mortgage.
Many people do not want to talk about the details of an ongoing divorce, but it’s important to inform your lender to protect everyone’s financial wellbeing. Relying on an ex-spouse to follow through with their share of the mortgage payment is a risky decision that could negatively impact credit scores or worse.
What are current refinance rates?
Divorce is complicated, but it does not have to be an end to your homeownership goals. Today’s low refinance rates make it more feasible to take on the entire mortgage payment for a divorcing party who wishes to stay in the home.
Check today’s rates and get a trustworthy assessment of all your options. Then make an informed decision on how you will move forward.