When couples divorce, they not only divide assets—they also divide debts. Usually, a couple’s biggest shared debt is the mortgage on the family home.
Couples going through a separation or divorce have a few options when it comes to dealing with a mortgage.
Sell the Home
Selling your home is the most straightforward option from a financial standpoint.
In this case, you both agree to end the mortgage contract and sell your house. If you are selling before the end of your mortgage contract, your lender may charge a payout penalty. Other possible charges include realtor and legal fees.
You will pay off the remainder of the mortgage loan to your lender upon sale and split any leftover equity in your home. You can split this equity 50/50 or however your separation agreement outlines.
One Partner Keeps the Home
Refinancing is required when both partners agree that one of them will keep the home. You can refinance in two ways: without or with access to home equity.
Buyout with no access to home equity
The partner leaving will request a “release of covenant” from their lender and the partner staying will assume the mortgage. Importantly, the partner who stays must re-qualify to carry the mortgage on their own. This option might result in a legal expense and a lender processing fee; it will not generate any cash from the home’s equity because the mortgage is fully assumed by the partner staying in the home.
Buyout with access to home equity
Alternatively, the partner who remains in the house can refinance up to 95% of the appraised value of the home. This will change the size of the mortgage and generate some cash that can be used for settling affairs directly related to the divorce (note: access to this equity cannot be used to pay off personal debts). Because the partner staying in the home will become the sole owner, they will need to qualify for the new mortgage on their own.
No matter how you refinance, your lender will request proof of your ability to make mortgage payments. Proof might include:
- a separation agreement
- the amount of any child support payments
- the amount of any spousal support payments
- an offer to purchase the home
- a home appraisal
If you do not qualify for the mortgage on your own, you can have someone else act as a joint borrower or guarantor. However, these are both big undertakings. Make sure you and the person you involve (such as a parent, close friend, or other family member) understand what is assumed when co-signing or guaranteeing a loan.
Lastly, remember: take the name of the partner leaving off both the mortgage and the land title. This must be done to legally release someone from the mortgage.
Both Partners Keep the Home
Former spouses can agree to remain joint property owners, but this is rare and carries some risk.
If you both remain responsible for mortgage payments post-divorce (whether you are renting the property to a tenant, or your ex-partner continues to live there), your ability to qualify for another mortgage, a loan, or a credit application will be impacted. You may have a harder time qualifying down the line.
It is best to consider selling or refinancing if there are no benefits that outweigh this risk.
No Matter What, Keep Your Credit Score Up!
No matter which option makes sense for you, it’s critical to keep your credit score up throughout the process. Continue to make your payments on time and in full as much as you can—especially on joint-payments.
Attempting to spite your former spouse by not making payments on joint bills or loans will only come back to bite you, as it impacts your credit score too! While this may be an extremely difficult time, do not do anything to sacrifice your financial future. You will need the highest credit score possible to move on to the next phase of your life with as many financial options available to you as possible.
I know how challenging divorce is and I am here to make this part of it easier for you. If you are heading towards separation or divorce, please contact me anytime for mortgage advice.