- Risks & benefits
- Questions to ask before refinancing
- Comparison table: refinancing options
- How to remove one spouse (refinance)
- Consequences of not refinancing
- Alternatives to refinancing
- Quitclaim deed
- Homeowner’s insurance updates
- Tips
In the aftermath of a divorce, many couples face the challenge of untangling their shared financial responsibilities. This can include real estate property division – what should you do with the family home?
In some instances, one spouse wants to keep the marital home, and the other wants out of it. How do you navigate the release of liability of one spouse and make it official in the eyes of your mortgage lender?
Let's imagine a scenario where John and Jane have recently gone through a divorce. John wants to move out and have his name removed from the mortgage, and they both agree that Jane should buy out her spouse’s share of the home and keep the house. This decision will free John from financial obligation and give Jane full responsibility for the mortgage payments.
The process of removing one spouse's name from the mortgage and transferring the responsibility to the other spouse can be complex, but with the right guidance, it can be done efficiently and effectively.
Financial risks and benefits of removing a spouse's name from a mortgage
If one of you wants to keep the marital home and will take over the mortgage on their new individual income, there are risks and benefits to be aware of.
Risks
1. Qualification risk
- Income and Credit: The spouse who remains on the mortgage must qualify for the loan on their own. If their income, credit score, or debt-to-income ratio isn’t strong enough, they may face difficulties.
- Higher interest rates: If the remaining spouse does not have strong credit, they may end up with a higher interest rate, and thus higher monthly payments.
2. Equity access for the other spouse
Once a spouse's name is removed from the mortgage and the title, they lose any future claims to the home’s appreciation in value. If the home increases significantly in value, the departing spouse forfeits potential equity gains. The remaining spouse might need to buy out the departing spouse’s equity.
3. Refinancing costs
Refinancing to remove a spouse’s name typically involves closing costs (e.g., appraisal fees, loan origination fees, and other expenses), which can range from 2% to 5% of the loan amount. In some cases, there may be penalties for paying off the original mortgage early.
4. Liability if refinancing fails
If refinancing or mortgage assumption isn’t possible and one spouse stays on the mortgage, both parties remain liable. If the remaining spouse defaults on payments, the other spouse’s credit can still be negatively affected, even if one is no longer living in the home but remains on the mortgage.
5. Loss of deductions
The departing spouse may lose the ability to claim a portion of the mortgage interest deduction on their taxes if they are removed from the mortgage and title, potentially resulting in higher taxes.
Benefits
1. Financial separation
Removing one spouse’s name from the mortgage ensures that they are no longer financially tied to the property. This protects the departing spouse from future liability if the remaining spouse defaults or misses payments.
2. Control
The remaining spouse gains full control of the property, including decisions related to selling, refinancing, or improving the home without needing the consent of the other spouse. They also retain 100% of the future equity growth in the home.
3. Simplified financial future
Both spouses may find it easier to qualify for new loans, credit cards, or mortgages since they no longer have the financial liability of the joint mortgage on their credit report.
4. Lower payments
If the remaining spouse qualifies for refinancing and secures a lower interest rate, this can reduce monthly mortgage payments and save on interest over the life of the loan. Refinancing allows the remaining spouse to potentially extend the loan term (e.g., from 15 years to 30 years) to lower monthly payments.
5. Minimizes future conflict
Once the departing spouse’s name is removed from the mortgage and title, there’s less risk of future legal disputes over the property. Each person has a clean break and clear financial responsibilities.
Questions to ask before refinancing
- Review your current mortgage interest rate and compare it to current market rates. Will refinancing give you a better rate?
- How many years are left on your current mortgage? Will refinancing extend or reduce this term?
- Will refinancing lower your monthly payment?
- What’s your credit score? Lenders typically require a minimum credit score of 620, and higher scores may qualify for better rates.
- What’s your DTI? Divide your monthly debt payments by your gross monthly income. Most lenders prefer a DTI of 43% or less for refinancing.
- Will you pay closing costs upfront or roll them into the new loan (which increases the loan balance)?
- Do you want a fixed-rate mortgage (steady payments) or an adjustable-rate mortgage (lower initial rate but possible future fluctuations)?
- If you have an FHA, VA, or USDA loan, do you qualify for a streamline refinance to simplify the process and reduce costs?
- Does your current loan have a prepayment penalty for paying off the mortgage early?
- Has your income been unstable or reduced – or might it become so? It may impact your ability to qualify for refinancing.
- How long do you plan to stay in the home? If you plan to sell in the near future, refinancing may not make sense due to upfront costs.
These are just some of the questions you need to answer before you can refinance your home. Seek advice from a professional, like a CDFA, if you are not sure.
Comparison table of different refinancing options
Here's a comparison table outlining the differences between FHA loans, conventional loans, and government-backed Streamline Refinancing options, including their eligibility criteria, benefits, and key details:
|
Option |
Eligibility Criteria |
Potential Benefits |
Down Payment/ Equity Reqs |
Credit Reqs |
Mortgage Insurance |
Other Considerations |
|
FHA Loan |
- U.S. citizen or legal resident - Credit score ≥ 580 (with 3.5% down) or ≥ 500 (with 10% down) - Debt-to-income (DTI) ratio ≤ 43% |
- Low down payment (as low as 3.5%) - Easier credit qualifications - Allows higher DTI ratios |
3.5% down for scores ≥ 580 10% down for scores 500-579 |
Min. credit score of 500 (580 for better terms) |
Upfront mortgage insurance premium (MIP) + annual MIP |
- Can be used for purchasing or refinancing a home - Flexible for first-time homebuyers |
|
Conventional Loan |
- Credit score ≥ 620 - Stable income - DTI ratio ≤ 36%–45% (varies by lender) - Higher equity requirements for cash-out refinances |
- No upfront mortgage insurance if >20% down/equity - More flexible loan terms (e.g., fixed or adjustable rates) - Higher loan limits than FHA loans |
3%-20% down (depending on lender) |
Min. credit score of 620+ required |
Private mortgage insurance (PMI) if down payment < 20% |
- More stringent credit and income requirements - Good for borrowers with higher credit scores |
|
FHA Streamline Refinance |
- Must have an existing FHA loan - On-time mortgage payments for last 12 months - Refinance must lower payments or shift from adjustable-rate to fixed |
- No appraisal required - No income verification - Faster processing - Can lower monthly payments |
No equity required |
No minimum credit score required (though some lenders may have standards) |
Same MIP as original FHA loan |
- Great option for those with existing FHA loans - No cash-out option |
|
VA Loan (Veterans Affairs) |
- Eligible veterans, active-duty service members, or surviving spouses - Certificate of Eligibility (COE) - No DTI limit, though lenders may impose |
- No down payment required (in most cases) - No PMI - Competitive interest rates |
No down payment or equity needed |
No minimum credit score requirement (lenders often require 620+) |
No mortgage insurance, but funding fee applies |
- Excellent for veterans or military members - Allows for purchase and refinance |
|
VA Streamline (IRRRL) |
- Must have an existing VA loan - Refinance must lower monthly payment or interest rate - No late payments within last 12 months |
- No appraisal or income verification - Fast approval - Can reduce monthly payments |
No equity required |
No minimum credit score required (some lenders may have standards) |
No mortgage insurance, but VA funding fee may apply |
- Only available for VA loans - Cannot be used for cash-out refinancing |
|
USDA Loan (Rural Development) |
- Must be buying or refinancing a home in an eligible rural area - Income must be below the local median - Credit score ≥ 640 preferred |
- No down payment required - Competitive interest rates - 100% financing available |
No down payment required |
Preferred score ≥ 640 |
Guarantee fee applies (similar to mortgage insurance) |
- Only for rural properties - Ideal for low-to-moderate income borrowers |
|
USDA Streamline Refinance |
- Must have an existing USDA loan - On-time mortgage payments for last 12 months - Home must remain in USDA-eligible area |
- No appraisal required - Simplified paperwork - Can lower interest rates and payments |
No equity required |
No minimum credit score required (though some lenders may impose requirements) |
Guarantee fee applies, though often lower than upfront mortgage insurance |
- Only for refinancing USDA loans - No cash-out option |
Key differences:
- FHA loans are ideal for borrowers with lower credit scores and minimal down payment availability, but they come with mortgage insurance requirements.
- Conventional loans work well for borrowers with stronger credit and more savings, offering better terms if you can avoid mortgage insurance (PMI).
- Streamline refinancing options (FHA, VA, and USDA) provide minimal documentation and faster approval, but they are only available for those already using that specific type of loan.
- VA loans and VA streamline refinances are exclusive to veterans and military members, offering no down payment and no PMI, making them attractive for those who qualify.
- USDA loans are designed for rural areas and come with zero down payment, but they have specific location and income requirements.
How to get your spouse’s name off the mortgage (refinancing)
To remove John's name from the mortgage, Jane may consider refinancing the mortgage in her name only.
The divorcing couple will need to go through a process called refinancing. This involves Jane taking out a new mortgage loan to replace the existing one, effectively allowing Jane to become the sole borrower.
Here's a step-by-step guide on how to refinance your mortgage:
Step 1: Assess the buyer’s financial situation
Before proceeding with the refinancing process, it's essential to determine whether Jane can afford mortgage payments on her own. She should evaluate her income, credit score, and debt-to-income ratio to make sure that she meets the lender's requirements for a new loan.
Step 2: Shop around for lenders
Jane should research and compare different lenders to find the best possible mortgage rates and terms. It's important to gather multiple quotes, as this will help her make an informed decision and potentially save money in the long run.
Step 3: Gather the necessary documentation
To apply for a new loan, Jane will need to provide several documents, including proof of income, bank statements, tax returns, and identification. Having these documents readily available will expedite the application process.
Step 4: Submit a loan application
Once Jane has chosen a lender, she'll need to complete a loan application. The lender will review her financial information and assess her creditworthiness to determine if she qualifies for a new mortgage.
Step 5: Have the home appraised
The lender may require a home appraisal to determine the value of your home. This step is crucial, as it ensures that the loan amount doesn't exceed the value of the property.
Step 6: Review loan terms and sign the agreement
If Jane's homebuyer application is approved, she'll receive a loan offer outlining the terms and conditions of the new mortgage. She should carefully review the details, including the interest rate, monthly payment, and any fees associated with the loan. If she agrees to the terms, she'll sign the loan documents.
Step 7: Close the loan
During the closing process, the new mortgage will replace the old one, effectively removing John's name from the mortgage. Jane will now be the sole borrower responsible for making the mortgage payments.
Consequences of not refinancing the mortgage after divorce
If the mortgage remains in both names without refinancing, there can be several potential consequences. Here's what could happen:
- Continued financial liability for both parties: Both spouses remain legally responsible for the mortgage, even if one spouse moves out. If the remaining spouse fails to make payments, both parties' credit scores can be negatively affected.
- Inability to qualify for new loans: The mortgage will continue to appear on both parties' credit reports, which may limit their ability to qualify for new loans or credit.
- Future disputes: Continuing to share a mortgage after a divorce can lead to future disputes, especially if the spouse living in the house fails to make payments, or if one spouse wants to sell the property later and the other doesn’t. Arguments can also arise over who is responsible for repairs, taxes, and other home-related expenses.
- Challenges in refinancing later: If the spouse remaining in the home wants to refinance at a later date, they will need to qualify for the mortgage on their own. If their income is not sufficient, or their credit score has declined, refinancing may not be an option. Waiting to refinance could also subject the remaining spouse to higher interest rates.
- Foreclosure risk: If the spouse responsible for the mortgage stops paying or can’t afford it, the home could go into foreclosure.
- Complicated future sales: If the spouse living in the home decides to sell it in the future, they will need the cooperation of the other spouse, since both names are still on the mortgage.
- Legal Issues: If the divorce agreement requires one spouse to refinance and they fail to do so, the other spouse may need to return to court to enforce the decree.
- Taxes: Both spouses may still be able to claim a portion of the mortgage interest deduction, but this could complicate tax filing. There may be disputes over who gets to claim this deduction if both names remain on the mortgage.
- Emotional Ties: Maintaining joint financial obligations like a mortgage can make it harder for both parties to fully move on from the marriage.
Alternatives to refinancing
If refinancing a mortgage after divorce is not an option, there are several alternatives.
1. Sell the house
This allows both parties to pay off the mortgage and split any remaining equity. It’s a straightforward way to end financial ties related to the property. Selling the house ensures that neither party remains responsible for the mortgage.
2. Assume the mortgage
Some lenders allow one spouse to assume the mortgage without refinancing, meaning the remaining spouse takes full responsibility for the mortgage. However, this option depends on the lender’s policies and whether the assuming spouse qualifies.
- Pros: It avoids the need for refinancing while removing the other spouse from liability.
- Cons: Not all mortgages are assumable, and the assuming spouse must still qualify for the loan on their own.
3. Loan modification
A loan modification is when the lender agrees to change the terms of the mortgage to make it more affordable. This could involve lowering the interest rate, extending the loan term, or adjusting monthly payments.
- Pros: It’s easier for the remaining spouse to afford the mortgage without refinancing.
- Cons: Both spouses may need to work together to negotiate with the lender, and approval is not guaranteed.
4. Co-ownership
Ex-spouses can agree to retain joint ownership of the home for a period, even though one spouse lives in it. They might share mortgage payments and maintenance costs, or one spouse might take over payments with an agreement to sell later.
- Pros: This can buy time if one spouse wants to stay in the home but cannot refinance yet.
- Cons: It leaves both parties financially tied to the property.
5. Rent the property
If neither party can afford the mortgage but doesn't want to sell, they can rent out the home and use the rental income to cover the mortgage payments.
- Pros: This allows the ex-spouses to retain the home and avoid default while waiting for better conditions to sell.
- Cons: Both will still be jointly responsible for the mortgage and managing a rental can add new complications.
6. Buyout agreement
If one spouse wants to keep the home but cannot qualify for refinancing, they can buy out the other spouse’s share of the equity. This involves paying the departing spouse for their portion of the home’s value.
- Pros: This allows the spouse staying in the home to maintain ownership without the need for immediate refinancing.
- Cons: The buying spouse needs access to significant funds, and both parties may remain on the mortgage unless a buyout is combined with other options like loan modification or assumption.
7. Second mortgage or home equity loan
If the spouse remaining in the home needs funds to buy out the other spouse or pay off the mortgage, they may be able to take out a second mortgage or home equity loan. This would allow them to access the equity in the home without refinancing the original mortgage.
- Pros: It can provide immediate access to cash without refinancing the primary mortgage.
- Cons: This adds a second loan obligation and increases monthly payments, which may be unsustainable.
8. Property settlement note
If one spouse wants to stay in the home but cannot afford to buy out the other, they can create a property settlement note. This agreement would stipulate that the staying spouse pays the other spouse their share of the equity over time.
- Pros: It allows one spouse to remain in the home without requiring immediate large sums of money.
- Cons: The departing spouse would not receive their full equity right away; both parties would still be tied to the home financially.
9. Rent-to-own or lease option
In this scenario, one spouse could rent the home from the other spouse until they can buy out their share. A lease option allows the staying spouse time to improve their finances and purchase the home later.
- Pros: This provides flexibility for both and allows time for the staying spouse to secure financing.
- Cons: The financial obligations of both continue until the buyout happens, and disagreements could arise during the lease period.
10. Divorce agreement with conditions for future sale
Divorcing spouses can agree to delay selling the house until a specific date or until certain conditions are met (e.g., when children graduate or the market improves). During this time, one spouse may live in the house and take responsibility for the mortgage, while both retain ownership.
- Pros: It provides stability for children or time for better market conditions.
- Cons: Both spouses remain financially tied to the property, and selling at a later date could still lead to complications if market conditions are not favorable.
Not sure what to do? Schedule a free call with our Real Estate expert.
Signing a quitclaim deed
A quitclaim deed will need to be filed to legally transfer ownership of the property from both spouses to the one assuming the mortgage. The deed must be notarized to validate its authenticity. Find a local notary public to witness and verify the signatures on the document.
Next step: Record the signed and notarized deed with the county recorder's office to make the transfer of ownership official.
Updating homeowner’s insurance
The company that insures the home must be notified about the change in ownership so the policy can be updated accordingly.
Tips
Undergoing a major financial transaction like this is stressful at any time, let alone during a divorce. Keep the following tips in mind.
- Consider mediation or legal advice. If there are disputes or complications, consider hiring a mediator or seeking legal advice to help navigate the process. Many divorcing couples find success with a trained, impartial mediator who helps them hammer out the details of their settlement agreement.
- Keep the lines of communication open. It may be tough, but the best way to accomplish this transaction is with open and honest communication with your ex-spouse. If everyone is fully informed, the transition is likely to be a smoother one.
- Call on Hello Divorce for help. We strive to help clients with all aspects of the divorce process. As such, we offer online divorce plans, mediation sessions, legal coaching sessions, help with financial planning, and a lot more. Schedule a free 15-minute call to introduce yourself and learn how we can help you through this process with as little stress as possible.
Need help understanding your home-related options?
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