Here's how divorce can affect your mortgage and some strategies to manage it
Divorce is stressful and oftentimes a complicated situation to navigate – and when there’s a house and mortgage involved, it can get even messier.
However, moving out of your home and being physically away from your former spouse doesn’t automatically disentangle your financial liabilities. Your commitment to marriage may have ended, but your commitment to your mortgage has not.
In fact, failing to arrange legal safeguards can seriously put your credit score in jeopardy. This will prevent you from accessing good mortgage rates and buying a new home in the future.
Knowing the impact of a divorce on your mortgage loan during the early stages of the process and what the most viable options are can benefit both parties.
How divorce affects your mortgage
Three possible scenarios can play out regarding your home loan.
First, the couple may find it easier to sell the home and divide the proceeds. Secondly, one spouse can purchase the house and have the other party’s name removed.
And lastly, one person will stay at the house while relying on the other to continue making payments.
There are distinct processes entailed by each scenario and some risks, particularly with the third arrangement.
The bottom line is that there is no single correct answer as to what happens to your mortgage when you get a divorce. The goal is to arrive at an agreement that’s beneficial or at least acceptable for both parties.
Your mortgage loan options after getting a divorce
Below are five ways that you can manage your home loan when you are getting a divorce. In most cases, the court includes matters regarding joint liabilities on your legal separation papers.
1. Refinancing the mortgage
You can consider this option if one spouse earns enough income to pay the mortgage on their own.
For example, spouse A can qualify for a refinance and own the property in their name alone. This will free spouse B from future mortgage payments.
However, the title must be updated to reflect only the new owner’s name. Otherwise, spouse B can still benefit from the sale of and equity in the home.
The two parties can agree to leave enough equity to shoulder the down payment. Afterward, spouse B will sign a quitclaim deed to relinquish further claims on the title.
Then, spouse A becomes the sole owner of the house and the only party responsible for the monthly amortization. They can now select a mortgage type that best suits their financial situation and ability to make timely payments.
2. Selling the house
One of the best solutions for divorcing couples is to sell the home, according to Andrew Vaughn, a divorce attorney and founder of the Chicago law firm NuVorce.
Besides refinancing, this is the most reliable option to protect both spouses from the risks of continuing with a shared mortgage. You just need to pay the loan balance and divide the proceeds as part of your divorce settlement.
The challenging part is you’ll each need a new place to live. Interest rates are currently low, so you can consider qualifying for a new mortgage to purchase a house on your own.
If you receive alimony checks as part of your divorce agreement, you can present them as a valid source of income to help you qualify for a mortgage.
3. Loan assumption
Assuming the home loan, where one spouse takes full responsibility for the mortgage, is another popular option. Like refinancing, spouse A will remain as the sole borrower and spouse B will be freed from future liabilities.
This approach can be more advantageous than refinancing if the assumable interest is lower than current market rates. Closing costs associated with assuming a mortgage are generally lower as well.
Perhaps the biggest downside is that you may need to pay a substantial amount to compensate your ex-spouse for the equity they’ve built.
You should also note that not all home loans are assumable. In fact, most mortgages made after 2008 do not have an assumable feature.
As such, it’s best to exercise due diligence. Avoid wasting time by calling your lender and ask for a copy of your original promissory note to know whether your home loan is assumable.
4. Retaining the original mortgage
There are situations where couples can’t refinance the mortgage or sell the house. Perhaps both their incomes are not enough, or one ex-spouse wants to stay at home with the children.
For such instances, the terms for paying the mortgage should be written in the divorce decree issued by the court – which is a less-than-ideal situation.
“Creditors and debt collectors don’t honor divorce decrees,” according to Bankrate. “If a judge orders your ex to pay a joint credit obligation, but he or she fails to do so, your personal credit could suffer.”
Retain the original mortgage only if you trust your former spouse. Even if you keep an amicable relationship, it’s entirely possible for one or both of you to suddenly lose the ability to pay on time.
This will render the divorce settlement useless and cause both your credit scores to take a nosedive.