A common challenge that splitting couples face is divorcing with a mortgage. Divorce is by itself quite complicated and decisions about co-owned property and mortgages can further complicate things.
If you find yourself in this predicament, you aren’t alone. The Centers for Disease Control and Prevention (CDC) reports that in 2017, close to 800,000 couples divorced. 2017 is the most recent year for which data is available.
About 60 percent of the United States population owns a home, which means that most divorcing couples have to make tough decisions when it comes to housing. Fortunately, there are tried-and-tested options for mortgages designed to allow both parties to move on after separation.
The options depend on several factors such as credit scores, home equity, and whether one half of the divorcing couple wishes to remain in the home. Just about any situation can be resolved using one of these options.
Refinancing the mortgage is probably the cleanest solution, which is where just one person’s name is left on the loan. Once the refinance closes, it is only the person whose name appears on the mortgage would be responsible for making the payments every month.
The name of the person that won’t be making the monthly mortgage payments could then be taken off the title of the property. If necessary, cash-out refinance can be used to pay out the portion of equity due to the individual that’s departing.
A mortgage refinance is the simplest solution for divorcing couples, but it only works if certain conditions apply. It is important to understand that there are at least several issues likely to prevent you from completing a mortgage refinance, including:
Income: You might lack the income to pay the mortgage yourself. You might find that the lender is not willing to approve the loan for a household with just one income. You might find yourself having to sell the property unless you are able to increase your income quickly.
Credit: Your credit scores might have fallen since you took out the original mortgage, which means that you no longer actually qualify for refinancing. A rapid rescore can help you overcome a low credit score, but success using this approach isn’t certain. The only real “fix” for a low credit score is rebuilding your credit history over a long period of time.
Equity: If you recently purchased or bought the property back when the values were higher, it might actually not have sufficient equity for refinancing. For example, if you have built just a few percent in equity, a refinance could be either unavailable or cost-prohibitive. Fortunately, you can find mortgage options that can help you overcome with the lack of equity.
If You Have Low Home Equity, Remove Your Spouse
In certain types of refinance, it is possible to remove a borrower in spite of the low equity position of the property.
Remove a Spouse Using Freddie Mac Enhanced Relief Refinance (FMERR)
The FMERR could work if you bought the property after October 1st, 2017 and your mortgage is not less than 15 months old. The loan is only available to borrowers with a Freddie Mac loan, but if Fannie Mae owns your loan, a similar program is available.
The remaining spouse will be required to re-qualify for the loan to prove that they are capable of making payments without a co-borrower helping out. A minimum score of 620 is needed for this. You also cannot get cash out with this loan and it would strictly be for removing one of the spouses from the loan.
FHA Streamline Refinance
If you last refinanced or bought the property using an FHA loan, you are allowed to refinance to remove a borrower. The remaining spouse, however, will be required to show that he/she has been making the full mortgage payment for the last 6 months. It is the ideal option for couples that have been separated for at least this duration of time. However, it isn’t ideal for those looking to finalize their mortgage situation immediately.
VA Refinance Loans During Divorce
VA streamline refinance can be used to remove a spouse after divorce. The veteran is typically the one to remain on the loan. If the veteran is the departing individual, the remaining spouse would be required to refinance into another type of loan.
If the remaining spouse is eligible for a VA loan, however, he/she may consider using a VA cash-out loan. It is an option that permits homeowners to open a loan of up to 100 percent of the current value of their home. Using this feature, the remaining spouse could pay put the departing spouse’s equity in the property according to the divorce decree.
When it comes to divorce, there isn’t any shortage of refinance options. However, if you are unable to refinance for whatever reason, you will be required to find an alternative solution.
Pay Off One Spouse for Their Share of the Equity in the Home
The court usually splits up the built-up equity in the home between the divorcing couple in many states. You have many tools at your disposal for raising cash to “buy out” your spouse so that you get to keep the house.
A home equity loan can be a good option if there’s equity in the property. You won’t need to refinance your first mortgage to do this. It is simply a second mortgage that’s added to your existing loan. Closing costs for these loans are usually low and the loans are easier and faster to secure than traditional mortgages.
A personal loan can be a good option if there’s little or no equity in the home. A personal loan does not depend on the property for approval, but rather your income situation and past credit history. Loan amounts go as high as $50,000 or even $100,000 in some instances. Approval is done in days as opposed to weeks and the property isn’t used as collateral. A personal loan can be a quick way for raising cash to pay for the departing spouse’s share of the equity in the property.
Sell the Property
Selling the property is yet another option. You and your partner could also agree to sell the property and share the profits. However, you would still be required to find out how the mortgage payments are to be handled before the close of the sale, but this is typically a short-term and not a long-term challenge.
Still, this solution might not be effective in a divorce case. Perhaps you have children with your spouse and don’t like the idea of forcing them to move out of the home where they grew up. Perhaps the real estate market in your area is currently weak and you fear losing money if you sell.
Equity matters when it comes to selling a property. It generally costs anywhere between 7 and 10 percent of the value of your home to sell. This includes taxes, agent fees, title insurance, along with several other fees.
Simply put, you might be required to sell a property for $220,000 just to break even if you owed $200,000. Otherwise, you might find yourself having to bring a check with you at the closing of the sale.
If you are unable to sell the property or refinance your mortgage loan, there’s still one more option available, but it has its own risks.
Keep the Home and Mortgage
If you are either not able or willing to refinance or sell the property, you still have the option of keeping both the home and mortgage intact. It therefore means that both parties will remain on the loan and will be liable for payments.
The approach requires specific language in the divorce agreement regarding who will be responsible for making the monthly mortgage payments. Perhaps the agreement will state that your former spouse will be responsible for paying the mortgage even though it is you and your children who will be living in it.
The agreement may also state that you and your former spouse will be responsible for paying half of the mortgage every month. Unfortunately, such an arrangement can lead to missed payments if your former spouse isn’t willing or able to abide by the divorce decree.
Let’s assume that your former spouse is required to make the mortgage payment every month, but your name is still on the loan. If your former spouse was to miss a payment, your 3-digit FICO credit score may drop by as much as 100 points.
If your name is still on the loan, the lender will consider you equally responsible for making the monthly payments. Your mortgage holder won’t dismiss later payments, even if the divorce decree states that your former spouse is responsible. It is due to this reason that a shared mortgage after divorce can only be effective in amicable divorces.
Protect Your Credit
To protect yourself, there are several steps that you can take.
The divorce papers could state that your former spouse will continue living in the house and apply for a refinance at a later date. Once the refinance is complete, your name will be removed from the mortgage. The divorce agreement might state that your former spouse will keep making payments until the finance closes officially and the mortgage is no longer your responsibility.
It is even possible to protect yourself further by inserting a clause in the divorce agreement. It could say that if your former spouse fails to close the refinance within a specific time period, the home that you once live in will be sold.
Keep in mind, however, that no matter what the divorce papers might say, it is impossible to fully insulate yourself from the actions of your former spouse when it comes to mortgages. Even if penalties are included in the divorce papers, there’s no guarantee that your former spouse will continue making the payments.
Divorcing couples looking for the safest option for all the parties should consider either refinancing the mortgage or selling the property.
What Are the Current Rates for a Divorce Mortgage?
Divorce might be complicated, but it doesn’t have to signal the end of your homeownership goals. The low refinance rates available today make it more feasible to take on the whole mortgage payment for a divorcing spouse that wishes to remain in the property.
Check the rates available today and get a trustworthy assessment of all options available to you. You can then make an informed decision regarding your best course of action moving forward.