What to Do with Your Mortgage in the Midst of a Divorce
As messy as divorce is, things can get even messier if a mortgage is involved. Thankfully, there are some options available to you in such instances. Although the two of you will need to be in agreement on what steps to take, after you do, you and the soon-to-be ex-spouse will get through this process without complication.
REFINANCE INTO THE NAME OF ONE SPOUSE
After you determine who gets to stay in the home, that individual can have the loan refinanced. The goal here is to remove your ex-spouse from the loan. They won’t have any more financial obligation to the property, post-divorce. The only purpose you should have is to take your soon-to-be ex-spouse out of the loan.
If one spouse wishes to refinance, you must show proof that affordability is feasible for the loan. Both spouses were part of the prior mortgage, and both of their credit scores and income were used for loan qualification. You need to establish that requirements for the program include one of the following:
• credit score
You can apply for preapproval using multiple lenders in order to determine your current status. Lenders will assess your proof of income in addition to a credit report. Both of these things will determine if you generate enough income to cover mortgage payments and other debts of yours. Sufficient home equity will also be necessary to refinance. Conventional loans, for instance, warrants a minimum of 3.5 to 5% home equity.
STREAMLINE REFINANCING CHOICES
If a VA or FHA loan is something you already have, you might qualify for streamline refinancing. Be mindful that cash can’t be taken out of a home’s equity under either program. Granted, if you are able to get a stronger term or reduced interest rate, that won’t hurt.
Huge qualifying factors are not necessary for a streamline program. Your history of mortgage payments is the only thing lenders will look at to ensure that the refinancing amount is beneficial to you. With regards to your history of mortgage payments, you need to show that the last half-dozen payments (at the very least) have been made by yourself (i.e., without assistance from your partner). That’s how a lender can establish if you will be able to afford a loan by yourself.
GET YOUR HOME SOLD
If both you and the spouse you’re divorcing are not in agreement on who gets to stay in the house, or neither one of you are mortgage–eligible, your only option might be to sell the home. Although you will need to take care of mortgage payments up until the home is sold, this is only for a short term. If you opt to get the home sold, you’ll need to establish particulars with courts and lawyers on how the equity will be handled. If the value of the property is greater than the mortgage, somebody will need to divide things up. Lenders aren’t able to disperse funds without a court order that dictates where funds should be allocated to.
REMOVE EQUITY FROM THE PROPERTY
If just one of the two spouses is currently on a mortgage, then it’ll be simpler to handle the mortgage on its own. However, if a spouse who is leaving is entitled to funds from the equity of a home, then it might be necessary to obtain a loan for home equity. Because neither spouse is on the initial mortgage, it might not be necessary to have the original mortgage refinanced. If you are content with the current interest rate, leave it be.
Application for a loan on home-equity is possible. It would be the property’s second lien, tapping into the equity of the property. Most credit lines or property equity loans allow as much is 85% LTV. As such, only 15% of a property’s value will be left untouched. This is a simple approach to paying your spouse off and taking ownership of the property without any worries.
LEAVING EACH SPOUSE ON A MORTGAGE
Occasionally, it isn’t feasible to free yourselves from a mortgage. If one spouse remaining in the home is ineligible for mortgages, or you’re unable to come to an agreement on selling the property (perhaps because you would like the children to get it), the situation can be tricky. Both spouses can remain on a mortgage, however, in doing so, each spouse’s credibility is at risk.
With that said, the spouse responsible for a mortgage should be the one to pay it. At times, courts order both spouses to make contributions to a mortgage. No matter what the situation is, the spouse with the greatest mortgage responsibility is the one that should be paying it. If they don’t, and you remain on a mortgage, your credit will be at risk. Your bank could hold you responsible for all financial obligations. Ensure you put a lot of consideration into this scenario before you agree to anything. You are encouraged to exhaust each option before going with this one.
Handling a mortgage when you’re in the midst of a divorce can certainly be messy, but easy ways to deal with it are on the table. Get a lender and lawyer you trust to guide you through this process. Ultimately, one spouse will either be responsible for the mortgage. Alternatively, the home can be sold, giving both spouses a fresh start.