Finance

Divorce & Mortgage: A Complete Guide

December 10, 2021

Aside from death and taxes, for many people, divorce and mortgages are near the top of the list of life’s unpleasant realities. Both are expensive, difficult to untangle yourself from, and take longer than you think to pay for. Now, handling a mortgage after a divorce is a whole other issue.

So, what happens to the house in divorce? Before you stick your head in the sand, take heed: learning your options and understanding the facts is the first step to dealing with, divorce, and mortgage questions.

Let’s take a look at the basics you need to know both to keep your mortgage shipshape throughout a divorce and to make a decision on what to do with the house during divorce settlement.

Who Is Responsible for the Mortgage in a Divorce?

“Responsibility” for a mortgage after divorce can refer to either the responsibility for making the monthly mortgage payment or the legal liability for defaulting on the home loan.

While you may agree on one or the other of you handling payments during a specific period, be aware that if you’re named on the mortgage, you’re equally liable for a missed or late mortgage payment and any mortgage debt.

Responsibility for mortgage payments could be addressed:

Via amicable discussion between the two of you
By documenting it in a separation agreement
In a divorce settlement to be filed with the court for approval with the final divorce decree

Even if you are not tasked with making payments, it’s important to protect your legal interests. To that end:

Review your mortgage statement monthly to confirm payment is made
Arrange email, text, or other lender alerts for late payment or other issues

If divorce mortgage payments fall behind on the marital home, it’s better to find out as soon as possible so that you can take appropriate action to protect your credit score and financial interests.

How to Handle Mortgage When You Divorce

Whether it’s been your dream home or just a place to rest your head, your house may be the biggest joint investment you need to divide in a divorce settlement. And unfortunately, “we each take half” isn’t a literal option.

In addition to monetary value, consider both the practical needs (particularly if children are involved) and any emotional or family history commitment built in the house. While you could sell, one of you might want to stay in the marital home or both of you decide that co-owning a house after divorce is best. This decision is not one to make in the heat of the moment, especially if the mortgage is more than they can afford on their own.

In most cases, couples going through divorce need to find a way to split the mortgage and equity they’ve built together in the home, whether it’s a 50/50 split or another percentage decided in the settlement process.

Next, we’ll go over the options for transferring responsibility and splitting equity.

Option 1: Mortgage Transfer

Wouldn’t it be nice to just erase one person’s name from the mortgage paperwork after divorce and have that be the end of it? It’s not quite that simple, but a mortgage transfer is possible.

An assumable mortgage is mostly a bygone practice, but there are still some contracts that include assumability, where you can transfer the mortgage to another person for a fee. More likely, you’ll need to contact your lender and request a transfer due to divorce. If the lender agrees, they’ll want:

A copy of the divorce decree
A quitclaim deed, properly executed and filed
Transfer fees
Evidence that the new sole borrower can repay the mortgage loan individually

Lenders aren’t required to grant requests for a mortgage transfer or assumption, but if they do, be aware of:

Continued liability – Lenders are reluctant to let go of contracted borrowers for major loans, so read the terms and conditions carefully. When the departing spouse files the quitclaim deed, that should be in return for the lender releasing that individual from any continued liability.
Credit damage – If the departing spouse’s liability is not severed under the new contract, any future late payment or default will equally damage their credit.
Credit report action – In addition to removing liability via the transfer paperwork, the lender also needs to remove mortgage liability from the departing spouse’s credit report.

Of course, this option requires that the spouse who will be removed from the mortgage after the divorce is happy to forgo their equity for the time being. Otherwise, you’ll need to consider one of the options below.

Option 2: House Buyout

If one spouse stays in the house after divorce, a buyout—paying the departing spouse their share of the jointly owned home equity and mortgage—is a clean option to make a new start. Separate from obtaining court approval of a settlement agreement that includes your buyout plan, steps of a divorce house buyout include:

Determine market value – You can find a rough market value using an online calculator, but an accurate number requires a house appraiser and, ideally, a listing agent.
Calculate home equity – Figure out your home equity by subtracting the remaining joint mortgage and any liens against the house from its current market value.
Change property title – The departing spouse files a quitclaim deed, giving up interest in the marital property, and the staying spouse changes the property’s marital title.
Remortgage – A new mortgage is drawn up for the individual keeping the house. Because this is one of the current owners, it’s classified as a refinance or remortgage rather than a sale.
Transfer funds to complete the buyout – The individual keeping the house pays out the amount owed to the departing spouse, which may be 50% of the home equity or another amount agreed upon as part of the divorce settlement. Alternatively, this transfer of home equity value is completed as part of the overall disbursement of marital assets.

Option 3: House Buyout With a Cash Out Refinance

If the home is the only asset or the spouse that wants to keep the mortgage after divorce it doesn’t have funds on hand to pay out half the equity, money can be freed up through refinancing.

In a cash-out refinance, you’re using your home equity to borrow an amount greater than what is still owed on the house. For instance, if you own a house with a $300,000 market value, and you still owe $200,000 on the mortgage, your home equity is $100,000.

Most lenders will limit you to borrowing 80% of your equity with a cash out refinance. So continuing the example above, you could borrow a total of $280,000 (the $200,000 you owe the bank plus 80% of your home equity).

You’ll still complete steps 1 through 5 above, but the cash to buy out your ex will come from the refinance under your new sole-owner mortgage financing.

Option 4: Convert Home Equity and Split Cash

Wishing you could have your cake and eat it too? You may want to investigate taking out home equity without remortgaging, refinancing, or selling your house. Keep your mortgage while you go through a divorce.

Look into this avenue to address:

Home Value Timing

While home values in most U.S. locations rose over the last few years, real estate market trends can be targeted down to the neighborhood. If you have reason to believe you’ll see a significantly higher sale price down the road, you may want to delay a sale even if a remortgage isn’t financially feasible.

Mortgage Rate Timing

Interest rate fluctuates based on several factors, and understanding how they’re trending will help you evaluate whether timing is an issue with your mortgage and divorce. As of late 2021, mortgage rates are still at a historic low of around 3% (versus a record high of over 16% in 1981). Analysts expect to see a slow rise as we move into 2022, with average mortgage rates hitting 4%. But a delay in sale or remortgage may be the way to go if you’re working to improve your credit score and loan candidacy.

Loan Denial

If you plan to be a single applicant for a mortgage or a new house buy after divorce, remember you’ll be analyzed only on your individual financial profile. You’ll need to prove your income history (usually for the prior two years) and continuing income. Remember that serious credit damage, such as a recent bankruptcy, can drastically lower your chances of approval.

Besides these factors, lenders evaluate your:

Credit score – While it’s possible to get an FHA loan with a score of 500, conventional loans generally require a credit score minimum of 620. Remember, this is not just a yes/no qualifier—it will influence the interest rate a lender will offer you.
Loan-to-value ratio – The maximum LTV ratio for a conventional loan is 97%.
Debt-to-income ratio – Your DTI for a conventional loan should be no higher than 36% to 43%.

If selling the house now isn’t the right decision and remortgaging poses a difficulty, then a direct tap to your home equity can be the right path.

A Sale-Leaseback Can Help

When divorce is on the horizon, your first priority is formulating a short-term plan that ensures mortgage payments aren’t missed in the chaos of the present. But it’s just as important to understand your options for how to deal with dividing the house in a divorce settlement.

While money doesn’t buy happiness, it is true that you face fewer barriers and have more choices if you can easily access cash to buy out your spouse’s share, buy a new house, or remortgage as a single person. For the majority of us, limited assets or income, dings to credit history, and other debt or responsibilities make it daunting to figure out what to do with the family home.

A sale-leaseback can serve homeowners and those who are often overlooked by the mortgage financing industry. These solutions keep you in your house after divorce while also removing your mortgage and converting the home equity that you have built up into cash. With a sale-leaseback, you and your ex-spouse can sell your home and convert the home equity to cash to split it. If either or both of you still need to live in the house, you can lease it back for as long as needed.

Key Takeaways

Let’s take a look at the basics you need to know both to keep your mortgage shipshape throughout a divorce and to make a decision on what to do with the house during divorce settlement.

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