Refinance The Mortgage
Many couples decide to refinance the mortgage to remove the spouse who will no longer be living in the home from the mortgage, but the spouse who is assuming the financial responsibility will need to make sure whether they can take on this financial burden. The lender is unlikely to take a name off a mortgage without refinancing. Here is what you should consider when thinking about whether to refinance the house after divorce.
Can You Afford It?
The spouse looking to remain on the mortgage will need to determine whether they are capable of loan assumption after the divorce. Assuming a mortgage after divorce is not always easy because the spouse may have less income to meet the same financial obligations since the other spouse’s income can no longer be depended on to help with the mortgage payment and related expenses.
When banks consider financing after a divorce, they usually take these factors into consideration:
If you want to refinance your mortgage after divorce, you will need to be able to show that your income alone will be sufficient to cover the mortgage and your other financial obligations. Banks may only want to offer a mortgage to you if your home to income ratio and debt to income ratio is below a certain amount. Lenders want to know that you will have reliable income to pay for the mortgage. This may be harder to establish if you recently went back to work after substantial time out of the job market.
Since disagreements over money are one of the most common reasons for divorce, your credit score may not be what it was when you initially purchased the home. Lenders may look for specific numbers and a solid history of making on-time payments.
Many lenders may not want to refinance a mortgage after divorce unless you have at least 20% equity in the home. If you and your spouse recently purchased the property or recently refinanced, this may pose a problem and may affect your options.
Fully Removing Your Spouse
Fully removing a spouse from the mortgage after divorce is not so straightforward. In addition to potentially refinancing after divorce, you will also need to square away legal ownership of the home. The mortgage just deals with the financing of the home, not the ownership. You will need to make sure that your spouse’s name is no longer on the title of the property. Otherwise, he or she may retain an ownership interest and be entitled to compensation if you later sell the house.
You may also need to consider how your spouse will receive their fair share of the home’s equity. If you both contributed payments toward the marriage (whether by pooling funds to make payments or one parent taking care of the home and children while the other worked outside the home), you will each be entitled to something toward these contributions. If you stay with the house, you may need to pay your spouse half of the value of the home when you refinance after divorce.
Here is what you need to know about fully removing your spouse from the mortgage and title.
Removing Them From The Title
In some situations, your spouse may be on the deed but not the mortgage. Divorce in these situations may be a little less complicated because you do not have to worry about refinancing after divorce. This may be the case if you financed the mortgage yourself because you had a better credit score or got better rates financing only under your name or if you purchased the property before your marriage.
You will still want to ensure that your spouse’s name is removed from the title if your spouse is on the title but not on the mortgage. You will need to have a new deed executed in which your spouse signs over their interest in the property to you.
Buying Them Out
If you are refinancing the house, your spouse may have equity in the home, so you may need to buy them out of their financial claim to the house. This is usually completed by refinancing the house and paying funds directly from the loan proceeds to your spouse equal to their share. Even if you owned the property before you got married, your spouse may still have partial equity in the home if they contributed toward payments or helped improve the property during your marriage, so you may need to compensate them for their share of the increased value of the property.
Mortgage in Husband’s Name Only Divorce
If the mortgage is in your husband’s name only, you will probably need to be able to shop for a mortgage on your own and use it to buy out your husband and finance the purchase.
Sell The Home
Rather than refinancing the house, you or your spouse may want to sell the home. This may be the best option for both spouses, especially in situations like:
You Can’t Agree On Who Keeps It
If you and your spouse cannot agree on who keeps the house, the easiest thing for the court to do is to order it sold.
Neither Party Can Afford It
If neither you nor your spouse can reasonably afford the house after divorce, selling it is most likely the best option.
Equity Between Spouses
Likewise, if you can’t afford to buy your spouse out, the most logical solution is to sell the house instead of not being able to fairly compensate your spouse.
Capital Gains Tax
If you and your spouse sell the house for more than you bought it, you may have to pay capital gains tax, so this additional cost should be factored in when considering your divorce and house settlement options.
Evaluating Home Equity
When considering your options for your house, you will need to evaluate your home equity. The home’s value and the portion of the home that you own outright will likely impact what you and your spouse choose to do with it.
Get An Appraisal
Getting an appraisal can help you to get an accurate estimate on the current value of the home so you and your spouse can make educated financial decisions about the property. The court can also order an appraisal of the home when it decides what to do with the property.
A professional appraisal is more exhaustive than a realtor’s investigation into comparable sales in the neighborhood. While an appraiser will certainly consider these, they will also consider other factors when determining the value of the property, including:
- Structural construction materials
- Recent updates
- Nearby features
- Proximity to transit
- Age of the home
- Home style
- Number of bedrooms and bathrooms
- Square footage
- Heating and air systems
- Curb appeal
Couple Must Agree On Sale Terms
Usually, the divorcing couple must agree on the sale terms for the sale of the property to go through. A spouse may be reprimanded by the court if they do not cooperate with the sale of the property. If the spouses cannot agree on terms, the court may order the property to be sold at auction.
Dealing with a divorce and mortgage can be a complicated matter that affects your financial and legal interests. Here are some additional things to consider when making decisions related to your divorce and mortgage.
Divorce Mortgage Payments After Separation
If one spouse leaves the home, he or she is still usually required to maintain mortgage and insurance payments on the marital property. Since the property will probably be sold or one spouse will be bought out, it is usually in both spouses’ best interests to maintain the property and avoid defaulting on the loan. If you think you may have trouble getting your spouse to be responsible while your divorce case is pending, you may need to ask a lawyer for help with establishing a temporary order from the court that outlines your spouse’s responsibilities.
Responsibility of Mortgage Payments
Until you refinance the mortgage on your house, whoever was on the original mortgage is still liable for the payment of the mortgage. Even if your divorce decree says that your spouse is responsible for the mortgage payments, if you fail to make payments, your lender may take action against you. The mortgage company is not a party to your divorce and does not have to obey orders from the court, so your divorce decree does not affect the contract you have with your lender. However, if your spouse is not meeting the obligations laid out in the divorce decree or settlement, you may be able to seek recourse from him or her through a contempt of court action. If you are depending on your spouse to make mortgage payments during your separation or after divorce, be sure that you have a way to check that these obligations are being met.
Costs of Refinancing
When considering your options, take into account the full costs of refinancing, such as having to pay extra fees or a higher interest rate. Your refinanced terms may affect you for 30 more years.
Even if you and your spouse agree that one of you will refinance the house and buy the other one out, the lender may not agree to a loan modification due to divorce. Additionally, if you pursue a contempt action due to a failure to refinance the property, your spouse may be able to show that he or she tried to refinance the property in good faith but was unable to get approval from a lender. If this occurs, you may need to consider other options, such as keeping the mortgage as-is or renting out the property.
Choosing the House Over Other Assets
Some divorced couples agree that one spouse will keep the house while the other one gets other assets equal to their financial stake in the home. It is important that you carefully consider the short-term and long-term implications of this type of arrangement. For example, if you keep the house and your spouse keeps more liquid assets like money in the bank, you may not have funds in case of an emergency. Or, if your spouse keeps their retirement account intact, you may have a less valuable asset over time than your half of the retirement account would have constituted.
Consult With A Lawyer Or Financial Planner
Divorce can potentially impact your financial standing and wellbeing for years to come, so it is important that you seek assistance from a legal professional or financial planner. These professionals can help you make informed decisions about your financial future and help you consider different scenarios based on the decisions you make during this pivotal time.