Wedding days are magical moments shared between a happy couple who vow to be together for better or for worse. They start a family, buy a home with a white picket fence, and live happily ever after.
Unfortunately, despite the best intentions, life does not always work this way for everyone.
Nobody ever kicks off their marriage thinking about divorce – but it may happen one day. And, if it does, what will you do with your marital home? What happens to a mortgage in a divorce?
The good news is that you have options, but knowing which one to choose comes down to a few key factors, including:
- Whether or not someone is going to remain living in the home
- How much equity is in the home
- How the property was financed and titled initially
Let’s take a closer look at the mortgage options in a divorce based on the most common scenarios.
Refinancing Your Mortgage
If you are getting a divorce and have agreed that one person is going to remain in the home, then refinancing the mortgage into one name can be an easy route to take. And because the refinance closes out the old loan and replaces it with a new one, the other spouse is no longer liable for the mortgage on the property.
Bear in mind that removing them from the mortgage does not remove them from the property’s title. This means they will still have rights to the equity and to the proceeds if the property is sold. So, be sure to take the additional step to update the title as well so that it reflects the sole owner.
Refinancing can be a great choice for those dealing with a divorce, but it might not be the best option for everyone. This is because the lender will still make that sole owner qualify for the loan. In other words, they will have to prove they have the income and means to cover the new mortgage premiums. And, yes, they will consider long-term alimony or spousal support, too.
Selling the Home
Many times, divorce agreements come down to selling the property and splitting the profit. If refinancing isn’t an option financially or if neither party wants to live in the marital home, then selling the property may be a good option.
With this, the mortgage gets paid off, there is no more dispute over how much the home is worth, and there are no costs necessary for refinancing. However, keep in mind that you will likely be responsible for the real estate commission fees, any improvements that need to be made to the home, as well as taxes.
Buying Out Your Spouse’s Share in the Property
It is possible for one person to remain in the home by buying out the other person’s share of interest in the property. This can be done using equity, as well as a new loan.
This is often seen as a 50/50 split between parties. For instance, if the property is valued at $400,000 and $300,000 is remaining on the mortgage (in both names) with $100,000 in equity. To buy out the other party, the spouse would need to pay their ex their share of $50,000.
Unless they have this amount of money in a bank, they will need to take out a new mortgage in the form of a refinance. This loan would be for the remaining $300,000 plus $50,000 for the ex.
While this can be a rather simple task when working with the right mortgage team, it does require that the sole owner qualify for the loan. Just like mentioned above, they will have to be able to prove they can make the loan payments on their own.
Keep the Current Mortgage, Remove the Spouse
If the mortgage is going into one person’s name, is it possible to keep your current mortgage without refinancing? Sometimes.
Most often in this situation, it leads to a refinance. After all, only the lender can remove your ex’s name from the mortgage. Should they agree to do this transfer, it is known as a mortgage assumption. They will transfer the existing mortgage to the one keeping the house and will often require a divorce decree and an executed deed showing that the ex no longer has an interest in the property.
It is imperative that you read the terms that come along with mortgage assumptions. Lenders are not at all required to allow them and can sometimes set the terms to protect themselves.
A couple of side notes to consider is if, by chance, only one spouse is on the mortgage, but both are on the title, a new deed can be drawn up removing the ex. The mortgage would remain the same.
Finally, it is always important to remember that keeping both parties on the mortgage after the divorce has been finalized means that you are both responsible for the repayment – regardless of who lives in the house. Depending on the situation, this could lead to negative impacts on credit health and one’s future eligibility to buy a home.
Explore Divorce Mortgage Options at Option Funding
Dealing with a divorce and the separation of assets can be a tough and trying time. Working with the right mortgage team at Option Funding, Inc. can help to lift some of the weight off your shoulders.
There are many options for mortgages, refinances, HELOCs, and more when it comes to settling your divorce and handling your marital property. The above is a very brief overview of what is available.
When you work with an experienced team with powerful relationships with many banks, you will learn that there are multiple ways things can be done to achieve the desired outcome. And Ahmad Azizi at Option Funding, Inc. can help. Contact us today to learn more.