Refinancing After Divorce: A Complete Guide
A divorce is a major change that can affect many aspects of your life. One of the major concerns is your future place of residence. Are you going to sell the house you shared? Or are you going to stay while your spouse leaves? And if so, should you be refinancing after divorce?
In many cases, refinancing is a straightforward way to transfer a shared mortgage to the spouse who will assume financial responsibility for the home. And like all refinances, it’s a complex process.
This guide will go over the factors to consider before you start shopping interest rates. It will also give you an idea of how divorcing couples can refinance real estate and what options to pursue if you can’t refinance an existing mortgage.
Can I Refinance My House After Divorce?
Refinancing a home mortgage loan after divorce can be a great option for separating your finances from those of your ex-spouse.
In fact, unless you and your ex decide to sell your current house and go your separate ways, a refinance loan is probably in your future. If one of you plans on keeping the house, you’ll want to take the other person’s name off the mortgage.
Can’t you just keep your current joint mortgage? While technically the answer is yes, there are reasons you may want to avoid this arrangement:
- It’s risky – Whoever is planning on moving out would take a big risk in leaving their name on the mortgage. No matter what you and your ex have agreed to, if you and your ex-spouse’s name are on the mortgage, you will both remain responsible for the mortgage payment for the duration of the loan term in the eyes of the bank. That means if the person remaining in the house can’t pay, the burden falls on the person who has already left.
- It can affect your ability to get a new mortgage – Lenders use the metric of debt-to-income (DTI) to assess whether someone is an acceptable risk for a loan. Your mortgage will count as part of your debt. If your name is on a mortgage of a home you no longer live in, the excess debt could hurt your ability to get a new loan.
- It can be expensive – Whoever is leaving the marital property will almost certainly want their share of the home’s equity when they go. When refinancing, this can be worked into the new mortgage. Without refinancing, you’ll need to find a way to come up with cash to pay out the equity in a divorce home buyout.
- It keeps you tied to each other – While no one wants a messy divorce, it would be naive to think that all divorces go smoothly. Making a clean break in property division during divorce proceedings is often the best solution to avoid acrimony. Being tied to each other financially through a mortgage can exacerbate any issues between the two of you. For example, one person’s missed payments could affect both people’s credit score.
Does Divorce Affect Refinancing?
You and your ex-spouse qualified for a joint mortgage. To refinance, you’ll now need to qualify on your own.
As a result, your financial circumstances may have changed. Perhaps your spouse was the bigger earner—or maybe you’re refinancing after a divorce with bad credit. In either case, you may find yourself facing different terms.
Divorce will have other impacts on your refinance and available interest rates. Divorce affects:
- Your DTI – Removing your spouse from your mortgage also removes their income from the DTI calculation. In turn, your new DTI could still affect the terms your bank is willing to give.
- Your credit – Do you have any shared credit accounts with your spouse? You’re probably going to want to close those accounts. Doing so will lower your overall available credit and change your credit utilization, which can negatively impact your credit score. To make up for the loss in shared accounts, you may decide to open new credit accounts in your name. This may help your credit availability, but it will negatively impact the average age of your accounts, which also affects your score.
- The amount of your mortgage – This one can be a bit tricky. Divorce doesn’t affect the value of your house, but it can change the total loan you need. This is because you have to buy out your partner’s equity. Your new mortgage will likely be for the balance left on your current mortgage plus the value of your partner’s equity share. This means all the equity in the house is now yours, but it also means your new mortgage may be higher than you initially assumed.
The timing of your divorce will also affect your loan terms. Your mortgage rates will be dictated by current market terms. This may work out in your favor, or it may mean higher rates on the refinance.
How to Refinance a House After a Divorce
Now that you have a sense of why you should refinance and the forces that may affect your loan terms, it’s worth looking into how you should go about refinancing.
It’s a two-step process—and stand warned, the first step is a bit easier.
Step One: Quitclaim Deed
First things first, you need to change the ownership deed to properly reflect that there is now only one owner of the home. This is accomplished with a quitclaim deed.
A quitclaim deed will remove the name of your ex from the title of the house. It is important to note that while this changes ownership, it does not affect your mortgage. To deal with your mortgage, you have to move on to step two.
Step Two: Refinancing
Once you’ve acquired your quitclaim deed, it’s time to refinance. However, going into the bank blindly is probably not the best strategy. You and your ex can take a few steps beforehand that will help you prepare and know what to expect. Going through these will also help you assess whether refinancing is the right option for your situation:
- Figure out how much your house is worth – You know how much you originally paid for your house, but times have changed. So has the value of your house. You and your ex should try to agree on what you think the value of your home is now. Sometimes, the best way to achieve this is by paying for a professional assessment.
- Figure out how much you owe on the house – Look at the current balance of your mortgage and factor in any loans or credit lines that used your home equity as collateral.
- Figure out your equity – Take the current value of your house and subtract what you owe. This figure is the current equity you and your partner share in your home.
- Figure out each other’s equity shares – This is where things can get contentious if you and your ex have different ideas. Equity isn’t necessarily split 50/50, especially if the house was owned by one of you before marriage. Equity can be determined as a part of your settlement during a divorce house split.
Once you’ve figured out all the numbers, you’ll have a sense of what your refinance is going to look like and whether it’s a feasible option. You’ll also want to check that you’re a good candidate for refinancing. Most lenders will require:
- Good credit – If you’re trying to refinance with bad credit, you may run into problems. Many banks look for a credit score of 620 or higher.
- Good LTV – LTV stands for loan-to-value ratio. Most banks want this number to be below 97%. That means you’ll only be able to get a loan for up to 97% of the current value of your home.
- Good DTI – As we noted, divorce can affect your DTI. You will likely need a DTI under 45% to secure a new mortgage.
If you meet all these requirements, you’re a good candidate to refinance. If not, you may need to start considering other options.
What Happens if I Can’t Refinance After Divorce?
Even if you’re not a good candidate to refinance, you have options. Some of the things you may want to consider include:
- Mortgage assumption – Most banks won’t simply switch the mortgage into one person’s name without refinancing. Most banks. Some banks will be willing to grant a mortgage assumption so long as you can provide proof of your divorce. You’ll want to go over the terms carefully with your bank, but this is an option for some people.
- Sell your home – Sometimes the best option is to sell and start anew. Neither partner keeps the current house, you cash in on your current equity, and you go your separate ways.
- Sale-leaseback – Through a sale-leaseback, you can sell your house and convert the equity into cash, then stay in your home as a renter. You may even be eligible to repurchase your home when your financial situation allows.
A Sale-Leaseback May Help You Simplify
All this talk of income and credit on top of all the other considerations that come with refinancing a house after divorce may feel overwhelming. A sale-leaseback solution may best fit your needs so you can access the cash you need while still staying in the home you love as a renter.
If you need a solution beyond refinancing after your divorce, contact a financial advisor to learn more.
If you’re looking for options to refinance after a divorce, a sale-leaseback may be the solution for you. Refinancing is usually a solution to transfer a shared mortgage to one of the spouses. If you are still unsure of solutions for refinancing, consult a financial advisor to discuss your options.
- The Mortgage Reports. Divorce and mortgage: Your divorce mortgage options in 2022. https://themortgagereports.com/19712/divorce-mortgage-your-options-when-separating
- Bankrate. Divorce and your mortgage: Here’s what to know. https://www.bankrate.com/mortgages/what-to-know-about-divorce-and-mortgage/
- Lending Tree. When Refinancing After a Divorce Does (and Doesn’t) Make Sense. https://www.lendingtree.com/home/refinance/removing-name-from-mortgage-without-refinancing/
- DivorceNet. Keep the House and Refinance the Mortgage. https://www.divorcenet.com/states/nationwide/keep_the_house_and_refinance_the_mortgage