A divorce dissolves your mortgage, but it doesn’t dissolve joint debt. You and your ex may be ready to go your separate ways and put the marriage behind you. But there are decisions to make, such as deciding what to do with a shared property.
If neither of you wants the property, selling can cut your ties with the family home. You can split the profit down the middle and move on, but this easier said than done. The local market dictates how fast a home sells. And while some properties sell within a couple of days or weeks, other properties sit for several months or longer. And if you owe more than the property’s worth, the home may never sell.
It isn’t the best situation to find yourself, but there are ways to deal with a mortgage in a divorce.
Sign Over the House
Together, you may decide that one person will keep the house. As part of the agreement, the person who moves out of the home transfers full ownership to the other, and the remaining spouse agrees to make the mortgage payment. This can work – just know that transferring full ownership to the other party doesn’t release you from the mortgage obligation.
Unfortunately, your mortgage lender doesn't care about your marital status. If you have a joint mortgage, which means both of your names appear on the home loan, a divorce doesn't mean you're off the hook for the mortgage. Understand that your deed and your mortgage are two separate things. So even if the divorce decree says that one person will transfer ownership of the property to the other, you’re both technically responsible for the payment for as long as both of your names appear on the mortgage.
Now, if the divorce is amiable and you trust that your spouse will continue to make the mortgage payment, you might be okay with your name remaining on the mortgage. This is your choice, but this decision can cause problems in the long run.
Although you’re no longer contributing to the mortgage payment each month, this debt remains on your credit report and counts toward your debt ratio. If you decide to apply for your own mortgage, the fact that you’re still carrying this debt can hurt your chances of qualifying for another home loan. This is because you maintain a measure of responsibility for the joint mortgage. If your ex stops making the house payment, the bank will come after you for repayment because you’re a co-debtor. For this reason alone, other lenders may conclude your income isn’t enough to carry multiple mortgages.
There’s another scenario to consider. Since your ex is now managing the mortgage without your assistance, he or she may find that the payment is too much to handle. Regardless of the type of agreement you have with your ex, if your name remains on the mortgage and your ex defaults and payments become 30 days past due, the late payment will appear on your credit report and remain for up to seven years.
Refinancing a Mortgage After Divorce
A number of problems can arise when you divorce and don’t dissolve a joint mortgage. So if your spouse wants to keep the property or vice versa, the safest option is refinancing and taking one person’s name off the loan.
You can contact your lender and ask to remove one person’s name from the mortgage without a refinance, but don’t get your hopes up. Depending on your mortgage program, however, the bank may allow one person to assume the mortgage. But even when this is an option, the remaining spouse must have sufficient income and good credit to manage the mortgage alone.
Since assumptions are rare, removing a name from a mortgage will require refinancing the home loan. The process is similar to getting the original mortgage. But rather than both of you apply for a mortgage, only the remaining spouse completes the home loan application and provides supporting documentation, such as paycheck stubs, tax returns and bank statements.
Refinancing and removing an ex from a mortgage is tricky. With the original mortgage, the lender used both of your incomes to determine how much you could spend on a property. And if the original purchase price required two incomes, there’s a chance you or your spouse won’t qualify for the property as a single borrower. Unless, of course, you’ve paid down the mortgage considerably since buying the house, or one spouse earns considerably more today.
Worst-case scenario is that the lender doesn’t approve the refinance. There’s no simple fix to this outcome, and you’ll have to make an importance decision. Do you remain married to the mortgage although your actual marriage is over, or do you consider other options such as a short sale? A short sale can get rid of the home loan, and given the circumstances the bank may approve the request. But since you’re selling the home for less than you owe, this type of sell damages your credit and you can’t qualify for another home purchase for at least three to four years.
If a bank approves the mortgage refinance, the new mortgage pays off the old mortgage, and once the remaining spouse closes on the new mortgage, the other is no longer responsible for the debt. This spouse then signs a quit-claim deed at closing to relinquish ownership rights to the property.
If you have a joint mortgage and you're getting a divorce, use the above options to deal with a mortgage.
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