What happens to my mortgage after a divorce?
In a perfect world, during a divorce the separation would result in either a mortgage refinance that puts the home under one person’s name or the divorcing couple would sell their home and the profits would be distributed accordingly. The problem is, it isn’t always that simple.
When it comes to divorce and mortgages, there are many things people don’t fully understand about how the ending of a marriage impacts the mortgage. One example of how this can play out in a negative way is one spouse stays in the home, but the other spouse is responsible for paying the mortgage. If the spouse outside of the home decides to stop paying, this will drastically hurt the credit score of the spouse in the home.
Divorce can get very ugly, so it is important to understand how to find the best possible arrangement for your particular situation as it relates to your mortgage. We’ve broken down a list of options and strategies for making your mortgage transition simple and smooth during a divorce.
5 Mortgage Strategies During Divorce
1. Refinance: This is the most straightforward solution for your mortgage during a divorce. Assuming the spouse remaining in the home can afford the monthly payment, a simple refinance to one person’s name will resolve this.
2. Low Equity Refinance: There are refinance options for those who have very little equity in the home. Some of those include a Freddie Mac Enhanced Relief Refinance (FMERR), FHA streamline or a VA streamline. Each has it’s own requirments and guidelines to consider.
3. Buying Out Your Spouse: In many states the equity built in the home will be split between the divorcing spouses. A home equity loan or a personal loan might be a good way to get the cash needed to pay off your spouse’s equity in the home.
4. Sell the Home: Another fairly straightforward option, selling the home would allow you and your partner to split the profits after the sale of the home.
5. Keep the Home & Mortgage: If you can’t sell the home or aren’t able to refinance, the other option is to keep the mortgage intact as is. This will require making it clear who will be paying the mortgage. This opens you up to risks if one of you aren’t able to make the payment or your share of the payment. Your credit will suffer and so will your spouses.
Protecting Your Credit – Mortgage Divorce Safeguards
In the scenario where neither your nor your spouse can qualify for a refinance and you can’t sell the home, it is critical to create safeguards to protect yourself during the divorce. As an example, if your spouse agrees to take over the mortgage until they can qualify for a refinance, you open yourself up to certain risks. If your spouse doesn’t make payments, your name will still be on the loan and your credit will suffer.
The safeguard for a situation like this would be that the divorce settlement would need to have language that states if the spouse staying in the home can’t refinance the loan within a certain period of time, the home will immediately go up for sale.
In another scenario, let’s imaging that the one paying the mortgage is the person leaving the home after the divorce. In order for the spouse in the home to be protected should the other spouse stop making payments, it is critical to have divorce settlement language that identifies mortgage payments as critical to the divorce agreement. With this kind of language, if the spouse stops making mortgage payments, they could be held in contempt of court and face legal action or even jail.
There are many other scenarios, but those are just a few to consider.