Divorce And Your Mortgage: Here’s What To Know

One of the biggest decisions divorcing couples face is what to do with their shared home. It’s often an emotional decision — and if the home has an outstanding mortgage, the situation gets extra complicated.

Here’s what to know about divorce and your mortgage.

Mortgage options in a divorce

Depending on the details of your mortgage, the circumstances of your divorce and other variables, you may have limited options for splitting your house. Here are some of the possible next steps:

1. Sell your home

The easiest option is often to sell the home and split the profits. Depending on where you are in the divorce process, you might agree to sell the home while the case is still pending rather than after it’s settled.

If you go this route — and many couples do — consider the costs. These might include the Realtor’s commission, the costs of repairs or staging, property transfer taxes and capital gains taxes. These expenses typically come out of the proceeds of the sale.

2. Refinance your mortgage

Some divorcing couples with a joint mortgage refinance to a new mortgage in only one person’s name. This releases the other person from responsibility for the mortgage. That person must also be removed from the house title, which you can do with a quitclaim deed.

Keep in mind: The party applying for the refinance can use only their own income and credit score to qualify, says Jeremy Runnels, CFP, of West Coast Financial in San Diego, Calif. “The lender is going to look at the individual and make sure they’re OK having them as the sole guarantor.” That could mean less advantageous terms — including a higher rate, given the state of current refinance rates.

But if the borrower will receive spousal support, they can use that income to qualify for a refinance as long as the divorce settlement stipulates that they will receive the support for at least three years, says Runnels.

3. Pay your ex for their share of equity

If you’ve built a substantial amount of equity in the home, the person keeping the house could apply for a cash-out refinance to buy out their ex-partner’s share.

The party keeping the home will still need to qualify for the refinance — and cash-out refinance rates may be higher than the rate on the original mortgage.

“Their income needs to be high enough to handle the new mortgage on their own, and the home must have the equity in it to take the cash out,” says Michael Becker, loan originator at Sierra Pacific Mortgage in Columbia, Md. “FHA and conventional cash-out refinances are capped at 80 percent loan-to-value, while you can go to 100 percent on a VA loan.”

If you want to keep the house and don’t have enough equity to do a cash-out refinance or the money to pay your ex their share, the solution might be a home equity line of credit (HELOC) or home equity loan. “Some lenders will allow you to go to 95 to 100 percent of the value of your home,” says Becker.

4. Other mortgage options after divorce

There are a few other mortgage options that may be worth considering amid a divorce.

For instance, it is possible to keep the mortgage as-is, but this approach can have drawbacks. Both individuals on the loan are still legally liable for mortgage payments, and if one person doesn’t pay, the other will be impacted. A divorce agreement should specify who is responsible for payments, but there’s a risk that one party may not follow such an agreement.

A mortgage assumption is another potential, but less common, approach. In an assumption, one mortgage holder transfers the loan to another person, who then pays the remaining balance at the mortgage’s existing loan terms and interest rate. Many mortgages don’t allow for assumptions, but it’s worth checking with your servicer. If it is an option, the process can also be used to formalize any changes in ownership of the home.

Divorce and mortgage considerations

Before choosing a course of action, consider the long-term impact on your finances. You may ask a financial advisor to help you weigh the pros and cons.

Evaluating your home value and equity

Whether you plan to refinance the joint mortgage or sell the home, you’ll need a professional appraisal to determine its worth — and the equity stake the parties have to split.

However, if a former couple doesn’t agree on the results of an appraisal, this can cripple efforts to move forward. Parties should strive to agree on an appraiser and to accept the outcome of the valuation, whatever it might be. (Likewise, if you decide to sell the home, you might include a provision in the separation agreement that you’ll accept the first offer on a home, provided it’s within a certain percentage of the list price.)

Remember that your home value — and thus, your equity — can affect the options for your mortgage. If you don’t have very much equity, you’ll have a more difficult time qualifying for a refinance, for example.

Tax implications

Whether you sell the home as part of the divorce agreement or buy out your spouse’s share, capital gains taxes could come into play. This is a tax on the sale of assets, such as a home, when the profit exceeds a certain amount.

If you sell the home, you and your spouse might be able to deduct up to $250,000 of gain each from your federal taxable income, but it applies only to the primary residence you’ve lived in for at least two of the last five years before the sale.

There are also tax considerations regarding spousal support payments. The spouse who earns a higher income and pays spousal support can’t deduct those payments from their taxable income, but the spouse receiving the support does not have to declare it as income.

The higher-earning spouse could make a case for paying less spousal support, which can lower the receiving spouse’s income to qualify for a new loan, says Runnels.

Conversely, spousal support payments might hurt the payer’s income and chances for a mortgage.

Protecting your credit

Divorce is an emotional, often volatile event — but the worst thing divorcing couples can do is take financial revenge.

“Many times, out of bitterness, I’ve seen one or both spouses ruin the credit of the other spouse,” says Becker. “They decide that it’s the other person’s problem and refuse to pay bills on joint accounts. This can damage your credit greatly and keep you from being able to qualify for any mortgage for a long time.”

The bottom line: Keep paying all of your bills through the divorce process to protect your credit.

“Close your joint accounts and get your own accounts set up,” says Runnels. “If you’re arguing with your spouse over who is going to pay a bill, and you get a ding on your credit, it’s going to be harder to get a loan.”

FAQ

• What happens if I keep my ex on the mortgage?
  

  Keeping your ex on the mortgage could present challenges. Your ex could refuse to make required payments, and if you can’t make up the difference, it will damage both of your credit scores and make it harder for you both to qualify for another loan. It’ll also be much more challenging to sell, gift or bequeath the home because your ex could claim some ownership of the property. In general, it’s best to take your ex’s name off the mortgage and move forward with your own, new loan.

• Do I have to inform my lender of the divorce?
  

  It’s important to inform your mortgage lender or servicer of your divorce. This could help you avoid delinquency issues if your ex decides to stop paying the loan, or their share of the loan payments, before the divorce agreement is finalized.

• How can I protect myself from being responsible for the mortgage if my ex-spouse fails to make payments?
  

  This unpleasant possibility means contacting your divorce attorney, as well as pleading your case to your mortgage servicer and possibly to the judge in your divorce. Communicate with your servicer as soon as possible and provide any relevant documentation, such as a divorce decree showing which party is responsible for mortgage payments.

• How does divorce impact a person’s ability to buy a new home?
  

  Following a divorce, you may find it more difficult to get home financing by yourself, especially if your earnings, savings and credit rating are substantially less than when you were part of a couple. Additionally, if the divorce has increased your debt, lenders may find you less creditworthy.

  To enhance your likelihood of obtaining a mortgage post-divorce, craft your divorce decree in a way that supports verifiable income. Documented evidence of child support or alimony payments received for at least six months is necessary. Also, ensure you have verifiable income, preferably in full-time employment. If you’re returning to the workforce, you might want to put home buying on hold for at least six months. Monitor your credit score and take measures to boost it, and lastly, collaborate with a mortgage professional who’s knowledgeable about financing options tailored to your situation, and even your sex (there are those specializing in single women, for example).

• Can you take a name off a mortgage without refinancing?
  

  A name can be removed from a mortgage through a mortgage loan assumption, through which one spouse assumes responsibility for the mortgage from the other. A name can also be removed from a mortgage through what’s known as a mortgage loan modification. Modifications typically involve altering loan features such as the terms, interest rate or the responsible parties. Lenders typically allow modifications when homeowners are experiencing financial hardship.

• What are my rights if my name is not on the mortgage?
  

  If your name is not on the mortgage, you are not responsible for the debt or payments. However, if your name is on the deed, you will still have an ownership interest in the home. And even if you’re not on either the mortgage or the deed, you may still be considered to have an ownership interest, especially if you made significant contributions toward buying or maintaining the home.

Additional reporting by Erik Martin