What Happens if I Can't Refinance after Divorce?
- Common reasons refinancing isn’t an option
- What should you do next?
- Moving forward after divorce
A refinance loan allows you to pay off your shared mortgage and assume full financial responsibility for the home you once shared with your spouse. It can be an attractive option if you want to keep your home after your divorce. But refinancing isn't always available.
Divorce can cause significant financial strain, and sometimes, lenders won’t loan more money to people who seem risky.
If you can’t refinance your mortgage, you have options. Examining them closely can help you understand which is right for you.
Common reasons refinancing isn’t an option
If banks refuse to offer you a new mortgage, you're not alone. About 8% of mortgage applications were denied in 2020, experts say.
Before issuing a refinance mortgage, lenders assess your ability to repay the funds you borrow. Your debt-to-income ratio plays a big role. Banks will examine the debt you plan to accept after the divorce compared to the money you'll earn through wages, tips, and investments. If your debts are so high that you'll struggle to pay them, refinancing won't seem smart.
Banks also examine your credit score. If you let bills or financial obligations slide during your divorce, your score could be very low, signaling that you don't keep the promises you make.
What should you do next?
If you've visited several banks and they all refuse to offer a refinancing mortgage, it's time to examine other options. Several are available, including the following.
Consider a release of liability
Contact the bank that manages your current home loan and tell them about your divorce. Explain that you'd like to take on full liability for future mortgage payments and that you'd like a formal document that removes your spouse from the mortgage.
This document ensures that your spouse won't be liable for any payments you miss, and it could make the offer both fair and more attractive in your divorce settlement.
Liability release isn't always an option. Some lenders, like Fannie Mae, will only issue a release if you can prove you can repay the mortgage alone. If you're struggling to get a refinancing mortgage, you could face the same problems here.
Ask for more time
If you can't get a new mortgage or a release of liability, you could enter a formal agreement with your spouse as part of your divorce settlement. You will agree to make all mortgage payments on time, under the current mortgage arrangement, until such a time that your credit score improves and you can get a new mortgage.
If you're in an emerging market, this could be enticing for your spouse. You'll stay in the home and make payments, and somewhere down the line, your spouse will get a payout when you refinance. That wait could result in big dividends.
Buy out now
If your spouse isn't willing to wait, you may be able to incentivize the deal. For example, you could find out how much your home is worth right now and trade assets so you can keep the house.
Let's say the value of your retirement account is $30,000. If both you and your partner have money set aside for retirement, you could give your spouse the amount in both accounts in return for the home.
In a deal like this, your spouse would have to wait until your credit score or financial future improves enough to allow for a refinance. There are risks involved. But this plan is fair and could allow you to keep your home.
Sell your home
Sometimes, all of your plans fall through. If your spouse won't work with you, or you just don't have enough assets to trade, it could be time to sell your home.
A home sale formally breaks ties between you and your spouse. You both share the profits, and you could use them to buy a new property you love and can afford.
Selling a home may seem difficult, but surveys suggest just 25% of people miss their home after the sale. Most people find new spaces to love, and they often like their new home more than their last.
Moving forward after divorce
During a divorce, almost every part of your life is changing. It's reasonable to hold tightly to your home, as it's one thing that seems both safe and familiar.
Work closely with your partner, and you could develop a divorce settlement that is fair and acceptable to both of you. You could potentially keep your home with these agreements.
But if you can’t keep your home, know that another one is out there waiting for you to find it.
What Should You Do With Your Marital Home in Divorce? Explore Your Options.
ReferencesThis Is the No. 1 Reason Americans Get Denied a Mortgage and It's Not the Reason You Might Think. (March 2022). Market Watch.
Servicing Guide. Fannie Mae.
Who Has Retirement Accounts? (August 2022). United States Census Bureau.
90% of Recent Home Sellers Have Regrets, Despite Hot Market. (November 2022). PR Newswire.