mortage refinancing

Mortgage and Refinancing Basics After Divorce

One of the most challenging decisions a divorcing couple must make is what to do with the marital home. You have several options, one of which is refinancing the mortgage. In so doing, the property can be placed under the name of one spouse. Another option is selling the home, in which each spouse would receive 50% of the profit.

In this article, we explore your options regarding what to do with the marital home and answer many of our clients’ frequently asked questions. 

Refinancing vs. selling

  • If you opt to refinance your home, you are likely doing it so only one spouse remains on the home title. In this situation, the spouse who retains the title would then be responsible for the mortgage.
  • If you decide to sell your home, you and your ex could split the mortgage payments until the property is sold. (However, if one spouse moves out while the property is on the market, the spouse who remains in the home usually pays for the mortgage on their own.) Once the property is sold, it might be split 50/50 or as per your divorce decree.

Updating your mortgage to reflect your decisions

If you and your spouse jointly agree on what to do with the home, you can update your mortgage to reflect your decisions. However, it’s important to understand that both spouses must agree before taking action.

Note that even after you make this decision, a judge can go against your proposed settlement agreement with their final divorce decree. While this is unlikely, it’s possible—especially if it appears the agreement is an inequitable division of assets.

A closer look at refinancing 

When you refinance, you trade in your current mortgage for an entirely new one. Since some of the home will already have been paid off, the size of the loan should be smaller, resulting in lower monthly payments.

While post-divorce refinancing offers many benefits, the primary advantage is that only one spouse remains on the mortgage. In return, the other spouse should be able to receive money that essentially pays out their share of the home. 

When refinancing, a quitclaim deed can be used to effectively remove the name of one spouse following a divorce.  

Doing it for the kids

If children are involved, some couples decide that one parent will remain in the home until the children reach 18. This is possible with mortgage refinance.

Cash-out refinancing

If you want to refinance your mortgage to wipe your name off the title, it’s still important that you receive your share of the marital asset. In the event that equity has built up in the home, said equity can be used to buy out the other spouse’s share. This process is known as a cash-out refinance.  

A note about credit

Before you attempt to refinance your mortgage, keep in mind that the spouse who intends to remain in the home must apply for a new mortgage with their own credit score and income. So, if you’re set to move out, you can’t use your own financial information to help your ex get the loan.

Applying for a home equity loan 

Once you’ve gone through the cash-out refinancing process that allows you or your spouse to receive their share of the home in cash, the process can be followed up by applying for a home equity loan. 

Notably, during the cash-out refinancing process, only a portion of the equity can be taken out in a lump sum. The sum can then be given to yourself or your ex-spouse.  

Some equity will need to be maintained to cover the standard down payment and closing costs. However, you can recover the remaining equity with a home equity loan as part of your divorce settlement. 

A home equity loan allows you to borrow against the current equity in your home to make sure everyone receives their fair share.  

What happens if you fail to refinance after divorce?

Even if you want to refinance your mortgage following a divorce, doing so may be impossible if the financial situation of the person applying for the loan isn’t good enough. 

If you fail to refinance after your divorce, the next best option may be to simply sell the home. This would allow you and your ex-spouse to each receive 50% of the proceeds.    

Does divorce affect your home equity? 

Getting a divorce doesn’t directly affect your home equity unless you decide to refinance your home. Both spouses are essentially entitled to 50% of this equity, which is why the home will likely need to be refinanced or sold altogether.   

Can I get a divorce mortgage loan?

Once your divorce has been finalized, you should be able to obtain a mortgage loan without experiencing significant delays or problems. It’s only during the divorce proceedings that a quitclaim deed may need to be signed by your ex-spouse. This action takes away their marital right to the home you’re applying for.  

Who can I turn to for help?

Whether you decide to refinance your home or sell it post-divorce, the assistance of a divorce mortgage specialist can prove invaluable. With extensive financial and legal knowledge, a divorce mortgage specialist can help you avoid costly mistakes and other pitfalls.

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