Divorce is messy, but it can be even messier when you have a mortgage in the mix. Fortunately, you have a few options at your disposal. While you have to come to an agreement on which step to take, once you do, any of these options will get you and your ex-spouse through the process.
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Refinance Into One Spouse’s Name
Once you work out the nitty-gritty of who will keep the house, that person can refinance the loan. The idea is to get the ex-spouse off the loan. That spouse no longer has a financial responsibility to the home. It’s not fair to leave him or her on the loan.
In order for one spouse to refinance, though, you must be able to prove that the loan is affordable. If both you and your spouse were on the previous mortgage, you used both incomes and credit scores to qualify for the loan. You must be able to prove that you meet all of the programs requirements including:
- Income requirements
- Asset requirements
- Credit score requirements
- Home equity requirements
Apply for a pre-approval with several lenders to see where you stand. They will look at your income documents as well as your credit report. This helps them decide if you make enough money to cover the mortgage payment plus your other debts. You also need enough equity in the home to refinance. For example, conventional loans require at least 5% equity and conventional loans require at least 3.5% equity in the home.
Streamline Refinance Options
If you have an FHA or VA loan, you may be eligible to use the streamline refinance option. Keep in mind with both programs that you can’t take any cash out of the home’s equity. Your sole purpose should be to remove your ex-spouse from the loan. Of course, if you can lower your interest rate or get a better term that helps too.
The streamline program doesn’t require hefty qualifying factors. Lenders only have to look at your mortgage payment history and make sure the refinance benefits you. Speaking of mortgage payment history, though, you must prove that you paid at least the last six payments on your own (without your spouse). This is how the lender can determine that you can afford the loan on your own.
Sell Your Home
If you and your partner can’t agree on who will keep the home or you neither of you can qualify for a mortgage, selling the home may be the only option. While you still have to handle the mortgage payments until you sell the home, it’s only temporary. If you do sell the home, you’ll have to work out with your lawyers and the court how to handle the equity. If the home is worth more than you owe on the mortgage, there will be money to split up. The lender can’t disburse the funds until they have the court order dictating where the funds go.
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Take Equity Out of the Home
If only one spouse is on the mortgage already, it’s easier to deal with the mortgage itself. But, if the spouse that’s leaving is owed money from the home’s equity, you may need a home equity loan. Since both spouses aren’t on the original mortgage, there may not be a reason to refinance the first mortgage. If you love the interest rate and term, leave it.
You can apply for a home equity loan. This is a second lien on the property that taps into the home’s equity. Most home equity loans or lines of credit allow an LTV of up to 85%. This means you only have to leave 15% of the home’s value untouched. This can be an easy way to pay off your spouse and own the home on your own without worry.
Leaving Both Spouses on the Mortgage
Sometimes, it’s impossible to get out of a mortgage. Whether the spouse keeping the home can’t qualify for a mortgage or you can’t agree to sell the home because you want it for the kids, it’s a tricky situation. You can both stay on the mortgage, but it puts the credibility of both spouses at risk.
The spouse that’s responsible for the mortgage should pay it. Sometimes courts order that both spouses contribute to the mortgage. Whatever the case may be, the spouse mostly responsible for the mortgage should pay it. If he or she doesn’t, and you are still on the mortgage, though, your credit is at risk. The bank could come after you for the financial obligation. Make sure you give careful thought to this situation before agreeing to it. Exhausting all other options first is always a good idea.
Dealing with a mortgage in divorce can get messy, but there are simple ways to go about it. Involve your lawyer and a reputable lender to help you get through the process. In the end, someone will either have the mortgage or you sell the home and you both start fresh.
