Understanding Your Mortgage Options During a Divorce
Divorce is never easy. It is often painful, complicated and something that most people just want to get through.
Whether you are legally separated, getting divorced, or already divorced, you may need to remove your ex from your mortgage and assume the loan on your own and you may be wondering what your options are.
Often in a divorce the spouses either agree to sell their home or refinance their mortgage so that only one person’s name is on it.
If one spouse is going to stay in the home and not sell it, you will have to agree to what will happen with the mortgage. The divorce agreement will then spell out who is responsible for paying the mortgage.
Perhaps you want to make sure that your ex is no longer financially responsible for repaying the loan, if you have both agreed that you will keep the house. Or you might want to make sure that your ex won’t get any of the proceeds if you sell the property (or inherit it if you die).
No matter why you are removing your spouse from your mortgage, you will have to follow certain steps, intended to protect you, your ex-spouse and the mortgage lender.
Here are some shared questions that come up regarding the mortgage in divorce beginning with can I remove my ex’s name from the home and mortgage?
First, you need to understand that removing a spouse from the home (aka title transfer) and removing them from the mortgage (aka refinance) are two completely separate tasks.
Many look at title and mortgage as being one in the same.
They are not.
So, can you remove your ex’s name from title?
Yes. In fact, in instances where one spouse has agreed to take over the house as part of the divorce settlement, it may be wise to have the former spouse’s name removed as quickly as possible so that they legally won’t get any of the proceeds if you sell the property or inherit it if you pass away.
Removing one party from the title does not; however, remove them from the current mortgage lien, assuming the loan is in both of your names.
The title transfer is accomplished through a simple grant deed or interspousal deed. The same cannot be said for the mortgage, which requires one spouse to qualify for a new mortgage on their own.
Let’s take a look at those steps beginning with taking your spouse off of your mortgage.
Taking Your Spouse Off Your Mortgage
You will most likely, not be excited about this news. There is only one way to have your spouse’s name removed from the mortgage and that is to apply for a loan to refinance the mortgage, in your name only.
Why is this? Well, your existing mortgage was approved in both of your names, giving the lender two sources of repayment. Although you and your ex may decide between yourselves that only the person who is getting the house will be responsible for paying the mortgage, that agreement doesn’t affect the lender. In other words, the mortgage lender can still come after your ex (or you, if your ex is getting the house) for repayment if the payments are not made, unless and until you refinance in your own name alone. This means that while you may not be living in the house, you could still have it affect your credit if your ex decides not to make the payments. Something to consider on both sides for sure.
You will have to complete a new mortgage application and qualify on your own for the house. You will have to prove that you will be able to make the payments on your own. The lender will look at your income, assets, debts, and credit score. If your credit and financials aren’t strong enough on their own to qualify for the loan you need, you’ll have to produce other options, such as making a larger down payment or asking someone to cosign the loan for you.
Removing Your Ex From Title
The next step is to remove your ex from the title. This is typically done through a quitclaim deed or an interspousal transfer deed, meaning that your ex gives up his or her rights to the property. This deed is then filed with the county clerk’s office and title to the property becomes updated.
Sometimes it makes sense to refinance this loan pre-divorce, prior to the judgement or dissolution going into effect. Often times the refinance is done prior to any settlement agreement being put together.
If you are updating title to the home in a pre-divorce refinance while still legally married, you will need to hold title as:
A Married Man/Woman, As His/Her Sole And Separate Property.
Then, once the divorce is finalized you can file another deed changing title from your sole and separate property to:
An Unmarried Man/Woman.
These are just a few of the important processes and timing considerations associated with the division of property.
Should I allow my spouse to have exclusive use of the home if I am still on title?
If you agree in a divorce settlement to give your spouse the home, ideally, they’ll refinance the home mortgage in their name only. This will provide reassurance that you no longer have any financial responsibility and will then be able to confidently sign over title to the home.
The exception to this is if there is a deferred distribution whereby both parties agree to maintain possession of the house until such time that a court orders the house sold, usually when there are no longer minor children living in the home.
What are the risks of not removing the ex from the mortgage?
Here are the primary risks for not removing an ex from the mortgage:
- Credit could be affected if the ex (who got the house) misses a mortgage payment.
- It could be hard to qualify for a new home because your name is still on the other mortgage and will be counted in your debt, even if you are not making the payments.
The divorce settlement agreement might state that the retaining spouse (the in-spouse) is responsible for all mortgage and housing expenses, but the credit bureaus do not care which party the property was assigned to. If you are co-signed on a mortgage with your ex-spouse, from the creditors point of view you have agreed to keep up timely payments.
In the event that a payment is missed, this will be reported directly to the three credit bureaus, which are Experian, Transunion, and Equifax.
What happens if you want to buy a new home? There are several items to consider, most importantly is that the additional debt may prevent you from qualifying.
In most circumstances, a lender looking at a mortgage application is normally able to exclude debt on a former residence provided the settlement agreement reflects such.
Lenders consider this as a legal assignment of debt and will not penalize the departing spouse for the additional debt. So, you will want to weigh the risks involved before agreeing to retain a joint mortgage following the divorce settlement.
Get Your Questions Answered Up Front
If you have home ownership questions related to divorce, you will benefit from the in-depth insights of a divorce mortgage advisor who will have knowledge about the divorce process and divorce-specific underwriting guidelines.
By performing a detailed underwriting analysis, a divorce mortgage advisor can offer guidance on how the mortgage fits into your settlement strategy.
While it’s true that divorce is a highly legal process, there are also several financial implications to a divorce as well. That’s why it may be a smart move to also consider retaining the services of a divorce financial advisor.
If your divorce is complex and there are complicated financial and tax implications, a divorce financial advisor can offer creative solutions, evaluate settlement proposals, and help you understand the long-term impact of your decisions.
