Mortgage Options After a Divorce

The division of real property – the marital homestead in particular – is one of the most important decisions during a divorce. Unlike other decisions like child support and alimony, property division in a divorce is final. Even so, there are options that can benefit all involved parties.

If my divorce papers make my ex responsible for paying our mortgage, am I off the hook?

NO, YOU'RE NOT! Ironically, it is much harder to break a mortgage loan contract than the marital one. No matter what happens to your marriage, the mortgage lender is still entitled to get paid. Since the mortgage lender has a signed contract bearing both names, it may pursue repayment of the debt from either you or your ex-spouse. The bank can do this because the divorce decree does not release you from the legal responsibility of honoring your original agreement to repay the loan.

There are generally four options regarding the future of your home to consider when divorcing:

1. Sell the house and split the profits. Sometimes, a home is filled with bad memories or you want to downsize. If neither you nor your spouse want to retain the house, consider selling it. In this situation, any remaining mortgage balance is repaid and any leftover money is divided between you and your ex. Even better: when the house is sold, you can each exclude up to $250,000 of capital gain. The property is deeded over to the new owners and the mortgage gets discharged.

2. Buy out your spouse. If you are court-awarded your home, you ex will deed over their ownership (Quit Claim) to you. If you owe you ex some money in exchange for their equity, you may have to refinance the home with a new mortgage that is large enough to both satisfy your old joint debt and buy out your ex-spouse. Paying off the old mortgage will also release your ex from that liability.

3. Let you spouse buy you out. If your spouse is awarded the house, it’s equally vital to have your name removed from the mortgage by having your ex refinance the home. If your former spouse is late in making mortgage payments on a property that you are still jointly obligated on, it will affect your credit hurt your ability to purchase a house of your own. Essentially, you would agree to deed over your ownership (Quit Claim) in exchange for the release of your liability on the old mortgage.

4. Maintain joint ownership and responsibility. It may not be possible for one party to buy out the other. In some cases, divorced parties will instead continue to co-own and possibly be co-obligated on a house for a specified amount of time (usually when it involves the welfare of young children). After that time, the house will either be placed for sale or one party may then be in the financial position to buy out the other.

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Qualifying for the purchase of a home after divorce

So you’ve decided to purchase a home. Congratulations! There are several things to keep in mind:

• You must qualify for a new mortgage with your own income.
• Under the correct circumstances, alimony and child support income can help you to qualify for your new home.
• Any alimony and child support obligations for which you are responsible are considered monthly debts and will lower the amount for which you qualify.
• Joint obligations on your credit report will effect how much you qualify for unless the divorce stipulation clearly indicate your ex-spouse is responsible for the monthly payment. (If it’s not too late, It’s advisable to reference account numbers in the stipulations.)
• Consider closing joint credit card accounts to block future use that might detrimentally affect each other's credit scores.

Get pre-approved before making an offer on a home. We can help you straighten out credit report issues and make sure you qualify for the least expensive program.