If you find yourself in the position of planning or going through a divorce, it is important to put your emotions aside and focus on how to properly arrange your finances — in particular, your joint mortgage.
The process of dividing a home can be extremely difficult. During the divorce proceedings, most people will forget about the finances and call their lawyers, when they should getting financial advice instead.
A mortgage is also a big financial liability. If both individuals are listed on the mortgage, it means you are both responsible, even if one of you no longer occupies the property. This financial responsibility is important to keep in mind when navigating a divorce, because it can impact your credit ratings and future mortgage options.
At Main Street Mortgage , we know divorce is an emotional process and getting a mortgage after divorce or separation can be challenging. We are here to help you select the option that will bring the best long-term outcome.
Watch the video below to learn how to manage your finances during a divorce:
5 Options for Mortgage After Divorce
After a divorce or separation, you will have five main options for your joint mortgage:
- Sell the Property
- Rent the Property
- Mortgage Assumption
- Mortgage Refinancing
- Stay with the Mortgage
In this article, we will discuss the merits of each possible option, as well as some of the details that you will need to consider in the process.
Sell the Property
The easiest way to handle a mortgage, and joint debt, is to sell the home. In an ideal situation, you should be able to pay off your mortgage with the sale of your home, split any profits, and move on. But, in certain circumstances, you may be faced with additional fees or debt.
One of these situations is if you owe more on your mortgage than what your home is worth. You have to be aware of this because you may have to pay the difference or opt for a short sale, and a short sale could affect your credit score.
One of the most important things to remember when dealing with your mortgage after a divorce is to protect your credit score. Make a decision that will keep your credit score in the best standing, because it will impact the type of mortgage or lending assistance available to you in the future.
If selling your home and paying off your mortgage is possible, you may still have to pay transaction costs, such as realtor fees and a penalty to break your mortgage early — contact your mortgage provider to be sure.
Rent the Property
If selling is not a viable option for you, another option is renting the property. This option will require someone to act as a landlord and arrange for the property to be managed, but the rent payments can help cover the mortgage payments, property taxes, and insurance.
Renting the property can be a short-term plan, until the mortgage and any additional costs have been paid, or it can turn into a continual source of income. Either way, renting will help offset the negative effect on future mortgage borrowing.
If you plan to apply for another mortgage while still making payments to an existing one, a lender will require proof that you are able to make sufficient and regular payments to both. Having the income from a renter will help increase your chances of being approved for a mortgage on a new property.
If you have questions about the process of securing a mortgage for a second home, contact Main Street Mortgage today to discuss your options.
Selling or renting requires both parties’ involvement or approval, but if this proves impossible or difficult to manage in a divorce, there are additional options. One of these is having one spouse assume the mortgage after divorce.
Completing a mortgage assumption after divorce will free the other partner from having liability for the property. If you decide to assume the existing mortgage, there is an approval process you will have to complete as well.
Firstly, you will have to fill out an assumption agreement and a release of liability. You must also provide proof of your financial ability to afford the mortgage payments. If your lender determines that you meet the requirements, you may also need to provide a copy of your divorce decree.
Finally, you will need to settle up with your partner, without using the home’s equity. This can be quite expensive, even if you were the primary income earner in your marriage. For this reason, mortgage assumption is less more commonly used than other options on this list.
Assuming a mortgage after divorce may be an option for you financially, but is important to emphasize that not every mortgage is assumable. Make sure you confirm with your lender that this option is available to you.
Mortgage refinancing is the most common option when one partner decides that they want to keep the home and take on the mortgage by themselves. It requires a rearranging of the mortgage and tends to be more costly than an assumption, but it also allows the remaining partner to settle up with their spouse using the home’s existing equity.
If you plan to refinance a mortgage after a divorce, you will have to qualify for a new mortgage based on your own income, debt, and credit score. The entire mortgage will be applied for under your name alone. Refinancing a mortgage will allow you to keep the home, but payments for legal fees, appraisal fees, and a possible discharge fee from an existing lender will be accrued.
When refinancing your mortgage, there are three different ways this can be completed:
- Break your current mortgage term early: Breaking your mortgage can allow you to access a lump sum of equity or obtain a lower rate in a new mortgage. You would be required to pay off your current mortgage and set up an entirely new one. There will be a prepayment penalty and, if you have a fixed rate mortgage, it will be greater based on the interest rate differential.
- Take out a home-equity line of credit: A home-equity line of credit wouldn’t get you a lump sum of cash, but it will provide a revolving line of credit. It is important to note that this line of credit would function as a separate mortgage product. A monthly payment is required, but only for interest on what you’ve borrowed, not on the total available credit.
- Get a blended mortgage: A blended mortgage is not a guarantee, but some lenders will approve the blending of your existing mortgage rate with a new mortgage rate. To access a blended rate you would have to pay a prepayment penalty based on the new terms.
Refinancing a mortgage after divorce may be a beneficial option, but not all types of refinancing may be available to you. At Main Street Mortgage, our team of experts are here to discuss your options and help find the best solution for your specific situation.
Stay with the Mortgage
If selling or renting the property is not plausible, and assuming or refinancing the mortgage is not financially feasible, then you and your ex-spouse have the option of leaving the mortgage in place. Divorce is emotionally exhausting, so you want to make sure that managing an existing mortgage with your ex-spouse doesn’t add to it.
If you choose to stay with the mortgage, you and your ex will have to keep up with payments. If either of you miss payments, the credit ratings of both parties will become impacted. Slow or missed payments, on behalf of either partner, can make future mortgages more expensive or difficult to obtain for everyone involved.
Staying with a mortgage can be risky, but if this is the agreed upon option, we encourage you to add layers of protection. Draft up an agreement that legally holds each party responsible for payments. This will require an additional legal cost, but it will help protect you, in case your ex-spouse fails to pay their share.
There is nothing easy about getting divorced, and no one buys a house with the intent of eventually splitting with a partner, but unfortunately things happen. Thinking about your mortgage may not be a top priority at the time, but it is something that you will have to be deal with eventually.
Working with professionals who understand the circumstances and the options available to you will help provide additional support. Contact the team of experts at Main Street Mortgage for help with divorce and mortgage today.