The reality is about half of all marriages end in divorce, a shattering experience that forces partners to divide assets and debt.
Things can get really complicated, especially when mortgage loans are involved. Many couples, especially those with two incomes, often have no choice but to sell their homes, pay off their loans and split the remaining money. Others opt to let one partner keep the property, often through a deed transfer and a reassignment or refinancing of the mortgage.
None of this is easy and deciding what to do with a home is both financially and emotionally stressful. But for those ready to cooperate, the choices don’t have to be traumatic or embittering. Couples often squabble over property, but those willing to face the inevitable and negotiate can avoid a costly and embittering legal battle.
Removing Your Spouse from Your Mortgage After Divorce
If neither married partner can individually afford to maintain their home and pay the mortgage, selling might be the only option. But if one person has the means to keep the property, the couple might consider retitling the deed and refinancing or reassigning the mortgage.
It’s important to remember that divorce isn’t a release from debt. That you are no longer married to someone doesn’t absolve you from your mutual debts. Preparing for divorce financially, especially for those with assets, typically requires an accounting of assets and debts, a decision on how to split them equitably and an execution of legal documents to divide financial and real estate assets.
If you decide that you want to keep your home and your divorcing partner agrees, you’ll face two concerns:
- You need to retitle the property, a step that involves a quitclaim deed that the partner giving up an interest in the real estate uses to transfer the property to the other partner.
- You should refinance or assign the mortgage to the partner assuming the ownership.
These steps need to be taken in sequence. The first step is drafting a divorce agreement and submitting it for court approval. The agreement is a blueprint for how your split will occur, including what you’ll do with jointly owned real estate and debt associated with it.
If one partner keeps the real estate, the other needs to sign a quitclaim deed transferring the title to that person. Once the deed is filed, the divorced couple need to resolve the mortgage.
Resolving the mortgage can be done in two ways:
- Removing the spouse relinquishing ownership from the mortgage
- Refinancing the loan and taking a new one in the name of the spouse keeping the property.
Dealing with the mortgage is very important. It is possible for a deed to be quitclaimed but for both divorcees to remain on the mortgage. If one decides to stop paying the mortgage, the other is obligated to make the payments. Failing to pay the loan would lead to default and foreclosure.
To avoid future problems, the mortgage needs to be transferred to the partner taking ownership. Lenders sometimes allow this, but often don’t. If your lender refuses, you’ll probably need to refinance, a more complicated process requiring you to apply for a loan in your name only and using part of the proceeds to pay off and close the old one.
Refinancing After Divorce
There are two ways to remove a divorced partner from a mortgage: obtaining a release of liability from the lender or refinancing the mortgage.
A release from liability is easier, but counts on the lender granting permission. The lender cancels an ex-spouse’s obligation to pay the mortgage after the person’s name is removed from the deed. The mortgage interest rate remains unchanged, as does the amount owed on the loan. A release from liability takes debt off the ex-spouse’s credit report and protects that person from liability if mortgage payments aren’t made on time.
Refinancing is a more common tool. It cancels the existing mortgage and requires the spouse keeping the home get a new mortgage. Replacing the two-party mortgage with a new one can allow the person refinancing the loan to take out cash to cover debts.
Here’s an example: Joe and Johanna divorce and Johanna opts to keep the house, appraised at $300,000. The divorce agreement requires Joe receive half the value of the house in cash after the unpaid balance of the mortgage is deducted. The home as an unpaid mortgage balance of $100,000, so Joe is entitled to $100,000 of its equity.
In order to keep the home and pay Joe, Johanna gets a new $200,000 mortgage. She uses $100,000 to satisfy the original mortgage and uses the remaining $100,000 to pay Joe his share of the sale. Joe and Johanna each end up with $100,000 – his portion in cash, hers in home equity.
One disadvantage of refinancing is taking on a longer pay-off period. Instead of a loan that would be fully paid off in seven years, Johanna must take a new 15-year mortgage. Of course, if she sells the dwelling at some point, she will keep all the equity remaining after the mortgage is satisfied.
Do I Have to Refinance After a Divorce?
Refinancing after a divorce isn’t required. Many couples decide that neither of them can afford the home and choose to sell it. Their lender might also allow the partner keeping the house to assume the mortgage, relieving the other partner from obligation.
Divorcing couples sometimes reach other agreements. They both might continue to own the home jointly and not change the mortgage even though only one of them lives in it. Sometimes the home is quitclaimed to the spouse who will live there but the other partner remains on the mortgage – a strategy that puts the departing spouse at risk.
Refinancing is often the best solution, since taking a new mortgage can generate enough cash-out to cover the vacating spouse’s equity. But it’s not full proof. The spouse hoping to keep the home will have to qualify for a new mortgage on his or her own. That means reaching the financial benchmarks that the lender sets for a loan.
Criteria for refinancing includes:
- A credit score of at least 620 for a conventional mortgage and a slightly lower score for an FHA loan.
- A maximum loan-to-value ratio of 97% for a conventional loan and 97.75% for an FHA loan.
- In most cases, a maximum debt-to-income ratio of 43%.
Since what might have been a two-income household becomes a single-income household after the divorce, it’s possible that spouse who wants to stay in the home won’t have enough income to meet the mortgage requirements.
In addition to a lower income, the divorce will divide any jointly owned savings and investment accounts. The situation is worse if the couple had debts and split them during the divorce.
Decreased income and savings, as well as a higher personal debt load that accompany many divorces might make finding a mortgage with affordable payments difficult or impossible.
Finally, if most of the couple’s credit accounts were in the name of the spouse leaving the home, the one wanting the keep the property might not have a sufficient individual credit history to qualify for a loan.
Transferring the existing mortgage to the spouse keeping the house might be the easiest way to settle the housing issue. Usually a lender will want copies of the divorce decree and a properly executed and filed quitclaim deed in order to transfer the mortgage.
Taking over a mortgage is called a mortgage assumption. Lenders aren’t required to grant assumptions and it’s important for you and your ex to review the terms of an assumption if a lender agrees to allow it. In some instances, the spouse relinquishing interest in the home might still be liable if the spouse keeping the property defaults on the mortgage or makes late payments. This could damage the non-owning spouse’s credit even though that spouse has no interest in the property. To avoid this, it’s important for the lender gives a release from liability to the spouse quit claiming the property.
It’s also important to have the lender remove mortgage liability of the non-owning spouse from that person’s credit report. If the spouse keeping the property misses mortgage payment deadlines and the other spouse still has the property on his or her credit report, it could result in a major drop in that person’s credit score. If a financial hardship as a result of the divorce was the cause of the missed payments, relief could be found in a mortgage modification.
Lenders are often reluctant to release a responsible party from the loan and they will want to evidence that the remaining borrower can repay the loan on his or her own. The lender almost certainly will charge transfer fees.
A mortgage assumption avoids the cost and uncertainty of refinancing a mortgage, but the terms are very important. Since refinancing and mortgage assumptions are complicated, it’s a good idea to discuss the options with a mortgage broker and a financial planner to decide which works best for you.