Divorcee’s Guide to Mortgages & Home Buying
As if the emotional challenges of divorce aren't enough, homeowners must also decide what is to become of the house they once shared with their soon-to-be-ex-spouse. It's vital to not only know what your options are, but to truly understand them so you can make an informed choice that's right for your situation. The following guide will discuss your options surrounding your current mortgage as well as those for buying a new home following a divorce. Note that it cannot substitute the advice of a licensed divorce attorney, especially as there may be state-specific laws to consider in your area.
Dealing with the division of property can be a particularly heartbreaking aspect of a divorce, so give yourself time to weigh the following choices carefully. Don't be afraid to ask your attorney questions about how your specific circumstances apply — the more confident you feel in your decisions, the easier it will be to let go and move forward.
Mortgage: Assumption, Refinancing & the Role of Quitclaim Deeds
Part of what makes handling the mortgage in a divorce so complicated is that there are a number of factors to consider:
- Your income & your spouse's income
- Whether one spouse wants to continue living in the home
- Current market value of the home
- Equity on the home
Addressing whether you or your spouse would like to keep the home is a good first step, and often depends on whether you have children together. Saying goodbye to the place where you spent your life together is emotional, but it's important not to lose sight of what's realistic for your finances. The fact is, even if it's your spouse who stays in the residence, you could still be held liable on the mortgage long after your divorce is finalized.
If you decide you'd like to stay and your spouse agrees, you have two main options for the mortgage: you can try to assume it, or you can apply to refinance it. If you assume the mortgage, you'll be responsible for the entire payment each month. In order to remove your ex's name from the document, you'll have to file a request with your lender. Keep in mind that in many instances, it's incredibly difficult to make a full mortgage payment on only one salary — and even if you're willing to try, your lender might not be comfortable taking the risk and deny the request. You may be able to rent out a room or section of your house as a way to help make the mortgage payment each month, but you'll have to inquire about property laws in your area.
If you apply to refinance the mortgage, essentially you'll re-apply for the same loan but under your income alone. Unfortunately, refinancing comes with quite a few costs and fees and could affect the amount of interest you end up paying. The lender will want to see that you have a strong credit history and sufficient income to make a monthly mortgage payment, which will be smaller than the one you had with your ex. The more equity you have in your home already, the better.
The problem for many couples facing divorce is that their home has gone down in value since it was purchased. If the house has become worth less than the balance of the mortgage, lenders won't be eager to make changes. Even in the event of a divorce, they aren't required to release anyone on your mortgage from liability — your ex would be held financially responsible if you defaulted on a payment.
In some divorce agreements, a quitclaim deed is used as a way to free the spouse not staying in the home of any and all interest in the property. It removes their name from the deed, but not, however, from the mortgage. For example, say you stay in the home following your divorce but weren't able to refinance the mortgage. You make some life changes to cover the entire mortgage payment, and your ex wants their name officially off the title. Signing a quitclaim deed would mean that, though they'd still be held liable if you missed a mortgage payment, they wouldn't have any financial responsibility if a major pipe burst in the home. Quitclaim deeds can be somewhat risky for both parties, so heed the advice of your divorce attorney with care.
The Safest, but Saddest Option: Selling the Home
In a majority of cases, the simplest option that benefits both parties equally is selling the home, paying off the debt balance, and splitting any profit. Of course, this is another area that depends greatly on the current market value of your home — especially if it's taken a fall. Some couples opt to hold onto their property a little longer in the hopes that the local housing market will bounce back. The question of what happens to the home in the meantime can get tricky, however, because both spouses are responsible for making the mortgage payments until the house is sold.
Some couples may choose to continue living in the house together (but separately) for a few months, though this isn't a good option in the case of particularly painful divorces. Other couples will rent out their house while waiting out market conditions. This can be a smart way to keep up with the mortgage payments on the shared property while still allowing you to use your personal income to find and pay for a new living situation. (More on that in a moment.) You must remember, though, that you'll share landlord responsibilities during this time and will need to have a positive working relationship with your ex. For those who can afford it, sometimes taking a loss on the house is the best step to cut all ties.
Moving Forward: Your Options for Home Buying Following Divorce
The truth is, your exact options for home buying will vary depending on your circumstances. If you're still tied to your old mortgage, you likely won't be able to take out a loan for a new home unless you can prove that you can afford two mortgage payments on only your income. However, if you are able to prove that you're renting out the home, your former spouse has assumed (and been consistently paying) the mortgage payments, or the home is in the final stages of being sold, you may be able to get a new home loan.
In general, it's best to avoid buying new property until after the divorce is finalized. Legal expenses will already be burning a hole in your wallet, so be conscientious in the meantime. Some divorcees find it cathartic to at least begin house hunting once they've separated from their ex, so feel free to get out there and see what the market is like. It might be in your best interest to keep your impending divorce to yourself, however, at least until all the paperwork is signed and filed. Some homeowners or real estate agents might feel hesitant if they think you'll be tied up in divorce court or facing steep legal fees.
If you decide to rent property while you're working out the terms of your divorce, your lingering mortgage will still show up on a credit report. It won't necessarily destroy any chances you have of finding a place, but it can be a red flag in certain circumstances. Landlords will be concerned about your need to make both a mortgage payment and a rent payment. They might inquire further about your income or other finances, or ask to see proof that your spouse has assumed the mortgage.
The Importance of Documentation
Whatever mortgage and property decisions you make with your ex, be sure that everything is spelled out clearly and explicitly in your divorce agreement. If your spouse will be assuming the residence and taking over mortgage payments, specify the exact date it will take effect and the amount of the monthly payment. Some choose to have some kind of penalty should one spouse default on a shared mortgage payment; after all, both parties will take a hit to their credit if there's any kind of lapse in payment.
Keep detailed records of every step you take. If you'll be selling, make sure to have clear documentation of every detail you and your ex have agreed upon. This can be especially important if you'll be taking a loss on the house — you'll want it in writing that each of you will need to bring the split balance of what you owe to the closing.
Avoid having any conversations about the mortgage or your home with your ex when your divorce attorney is absent. Even conversations that start out completely innocent can escalate into a bitter argument, and you don't want to lose any progress you've made. If you share custody and have to regularly see each other, keep your conversations focused on the children. Don't discuss any of your legal woes with your kids, even if they ask. Even inadvertently “bringing the kids into it” can cause major issues between a divorcing couple, especially when they are trying to cope with their separation of property.
It might feel overwhelming now, but understanding your mortgage and home buying options is half the battle. Talk to your divorce attorney about what state laws may come into play in your situation, and make sure you walk away from each meeting feeling confident in your next step. In time, you'll be able to take those final steps forward into a new home, mortgage, and life.
