Divorces are rarely simple. A divorce involving a mortgage happens often. Something that can make them even more complicated, however, is making choices about a home and mortgage that are co-owned. This challenge isn’t unique to your divorce.
Approximately 60 percent of all Americans own a home, which means that most divorcing couples have to make some hard decisions about housing. There are proven mortgage options that can help both sides of a divorce move ahead with their lives following a separation. Such options usually depend on a variety of factors, including credit scores, home equity, and if one of the two people would like to stay in the home.
Nearly any set of circumstances can be answered with one of the options that are available.
Option 1: Refinancing the Mortgage
The simplest solution is refinancing the mortgage in a way that leaves only the name of one person on that loan.
When the refinance closes, the responsibility for the monthly mortgage payments would fall only on the shoulders of the person staying alone on the loan. This is a chance to remove the name of whichever person isn’t going to making any mortgage payments from the title to the home. If need be, consider cash-out refinancing to pay out any percentage of equity that is due to the departing party.
It’s potentially the cleanest solution, and yet it will only work provided certain conditions. There are several issues that can prevent you from doing a refinance.
You might not have enough income to independently pay the mortgage yourself. You could discover that your lender won’t approve a loan for just a single-income household. Unless you’re able to rapidly increase your income, you might have to sell your home.
It’s possible that your credit scores fell since you first took out the original mortgage loan. That could mean you don’t qualify for a potential refinance anymore. A rapid rescore might overcome an otherwise low credit score, but the success rate of this technique is not a sure thing. Many times, the only thing that can address a person’s low credit score over time is rebuilding credit history.
If you recently bought the home or purchased it at a time of higher property values, then your home might not have sufficient equity for a refinance. For example, if you only have a few percentage points of equity, then a refinance might be cost-prohibitive, and maybe even totally unavailable. Fortunately, mortgage options do exist that can help you out with any lack of equity.
Option 2: Pay The Spouse Off for Their Home Equity Share
Many state courts let divorcing couples split the home’s equity that’s been built up between two divorcing partners.
You can use many different tools to raise the cash necessary to ‘buy out’ your spouse in order to keep the home. Consider using a home equity loan if you have any equity built up in your home. This wouldn’t involve refinancing the initial mortgage you had first. You’re just adding a second mortgage on top of it. You’ll enjoy low closing costs, and these kinds of loans are much easier and quicker to get than primary mortgages.
A personal loan might work if your home doesn’t have much equity if any. Personal loans won’t rely on your home to get approval, although your income circumstances and past credit history will certainly matter. Loan amounts range from $50,000 up to even $100,000. Approval takes days rather than weeks, and you won’t have to put your home up as any collateral.
All in all, a personal loan can be a fast way to start raising cash so you can pay off the equity share your departing spouse has due to them.
Option 3: Keep Both the Mortgage and the Home
If you’re neither willing nor able to refinance the home or sell it, then you might choose to just keep your home and maintain the mortgage as it currently sits.
Both parties would stay on the loan, and both would be liable for payments. This would require very specific language in your divorce agreement about who makes the monthly mortgage payments. Your agreement could state that the former partner pays the mortgage, even if you stay in the home with the children.
Your divorce agreement could also stipulate that you as well as your divorcing spouse each pay half of the monthly mortgage. Bear in mind that this set of circumstances results in missed payments should your former partner fail to abide by the agreement, either by choice or error. Assume an example where your former spouse has to pay the monthly mortgage, but your name is still on the loan. If your former spouse winds up missing a payment, then you could take a triple-digit fall on your FICO score.
If your name stays on the loan, then your lender assumes that you are equally responsible for making the monthly payments. Your mortgage holder isn’t going to dismiss your late payments, even if a divorce decree stipulates your ex as responsible. Given this, a divorce shared mortgage is only likely to work in an amicable split.
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