What happens to your mortgage if you divorce? Read on to learn about your options for keeping, selling, or refinancing your home in this guide.
Those going through a divorce may find that this process impacts just about every facet of their life, from shrinking social circles and straining familial relationships to adding additional financial pressures. It should come as no surprise, then, that going through a divorce can also significantly impact a mortgage.
But while uncertainty surrounding a mortgage can add extra stress to the pile, knowing what to expect will help smooth out this transition.
Whether you’re going through a divorce or know someone who is, keep reading to learn more about divorce and mortgage –– and how to deftly navigate this process.
What happens to a mortgage in a divorce? In the same way that securing financing through an auto loan is typically the first step toward a new set of wheels, getting approved for a home loan –– or a mortgage –– is the prerequisite for homeownership. Seeing as the value of a home loan can be hundreds of thousands of dollars more than that of an auto loan, it makes sense that this process can also be far more involved.
For married couples jointly seeking a mortgage, things like individual credit scores, assets, and debt-to-income ratios will come under intense scrutiny. And should these numbers be enough to reassure lenders, the outcome will be heaps of paperwork –– with both spouses’ names on each document outlining individual or collective repayment responsibilities. So, should couples make the decision to separate, the lender will still be sure to get their repayment, with the onus being on the borrowers to determine how exactly this will happen.
In so few words, divorce doesn’t impact your mortgage as much as it impacts those responsible for the mortgage. So, if you plan on buying a house during a divorce, with proper research, it won’t pose much of a problem. Furthermore, should the marriage’s dissolution be an amicable one, the divorcing couple may be able to come to a resolution regarding individual financial responsibilities and the path forward (more on those later.) This can help preserve the personal relationship, while also ensuring that each party can walk away from the marriage (financially) unscathed.
But in divorces riddled with conflict, tension, and blame, exes may find that the divorce can have a lasting impact –– on creditworthiness and future viability as a borrower. Let’s say, for instance, that one spouse moves out of the home and therefore feels that, since they aren’t living there anymore, they shouldn’t be responsible for the mortgage payment.
The ethics of this decision are not for us to discuss here, but the reality is the remaining spouse is now left with a full mortgage payment on a single salary. Maybe they can barely afford this, meaning other bills or necessities must fall by the wayside to prevent foreclosure. Or maybe their single income spreads them too thin, causing them to miss payments and send their credit score into a freefall. There are countless ways divorce can impact your joint mortgage, many of which can create financial ripples persisting for years (or decades) to come.
Considering the impact divorce can have on both a mortgage and the people paying said mortgage, spouses must understand the full range of mortgage options available to them. Below are a few which, when done correctly, can help preserve personal relationships and financial well-being.
When married couples buy a home together, the terms of the mortgage are generally oriented toward their joint income, collective debt, and composite credit profile. Refinancing will allow divorcing couples to shift full responsibility to one party –– meaning the exiting or divorcing spouse is no longer on the hook for the mortgage payment or held liable if said mortgage loan goes unpaid –– but it also means that the mortgage lender’s terms might not be as friendly to a single borrower as they were to the pair. So, if you decide to explore this route, you’ll want to be sure that you can afford it, and that you aren’t signing on to unfair terms just to keep the home.
Another mortgage option for divorcing couples involves buying out your spouse’s equity share and retaining sole ownership –– or selling your share to your divorcing spouse instead. This can be a good option for homeowners who would prefer to stay in the home, while their soon-to-be ex has no plans to stick around. But it can also be extremely costly, as those looking to buy out their spouse will likely need to qualify for another loan (to cover the cost of their spouse’s equity share) while also assuming full responsibility for the existing mortgage.
If you and your spouse have marginal differences in your financial situations, it might benefit you to assume the opposite role –– selling your stake in the house or marital property and cashing out your home equity to downsize. Ultimately, it’s up to you and your spouse to decide whether this option is right for you, and you should conduct a careful audit of your finances (present and future) before releasing your share or buying out your spouse.
When going through a divorce, the best option may not always be the most obvious one, with many divorcing couples searching for alternative solutions. One such solution is a sale-leaseback: a way for homeowners to access their home equity while continuing to live in their home for as long as they like.
In this scenario, one party may pay their ex-spouse their share of equity while continuing to live in the home, the two may divide it evenly while one spouse moves out, or the two may bank the equity and continue to live in the home as roommates. If that last scenario sounds a bit far-fetched, consider this: No two situations will be the same, and our Sale-Leaseback provides an option for nearly every one.
In many cases, the divorcing couple might realize that the best thing to do as this chapter closes is to sell the house or marital property and walk away simply. This is especially true if neither spouse can afford to keep up with the existing mortgage on their own, as refinancing or buying the other owner out may do nothing more than prolong the inevitable.
For divorcing couples who have lived in their shared home for a while, they may have hundreds of thousands of dollars worth of equity tied up in the home –– more than enough to move on to something new as they close this current chapter. At best, selling the shared home can end up being a therapeutic end to the marriage. At worst, it may just be a way to prevent years of animosity and feuding long after the divorce has been finalized.
For those currently navigating a divorce, thinking about what might happen to your existing mortgage probably seems like just one more item on the growing list of things to deal with. We hope, however, that we showed how having a plan and understanding your options can help smooth this process. And that, even though this period may be challenging, some good can come of it.
Want more from the Truehold team? Check out our free resource library for articles on everything from calculating your home equity to getting the most out of your home’s sale.
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