6 options for handling your mortgage when getting a divorce (original) (raw)

Divorces can get messy. And if you own a home together, that only complicates matters.

Do you sell the house? If not, who gets it? More importantly, how will you handle paying your mortgage moving forward? There are lots of questions — and, often, no easy answers. Fortunately, you have several options if you have a mortgage with someone you are divorcing.

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If you and your spouse were co-applicants on your mortgage loan, then you’re both responsible for paying it back — whether you’re still together or not.

Failing to make mortgage payments could not only hurt your credit (both of yours) but also eventually lead to foreclosure. Here are some options to help you avoid these kinds of repercussions.

1. Sell the house

Selling the house is likely the most straightforward option. With this strategy, you can simply take the proceeds from the home sale, use them to pay off the mortgage loan, and then split any remaining profits between you if that’s what your state’s laws call for. But the process of splitting the profits will vary by location. For example, if you’re in an equitable distribution state, the judge in your divorce case may stipulate that profits are divided differently based on what they decide is “fair” for each spouse.

Still, this isn’t the best option for everyone. Maybe one of you still wants to live in the home, or it’s not a great time to sell a home in the current housing market. Good news: If you don’t want to sell, you have several other options.

2. Refinance the mortgage

Let’s say one of you wants to keep the house, but the other does not. The spouse who wants to stay can refinance the mortgage into their own name. This would require applying for a new loan — and qualifying for it based on only the single spouse’s finances. Once approved, the staying spouse would be the sole borrower and responsible for all payments going forward.

If you’re considering this strategy, keep in mind that refinancing replaces your entire original mortgage loan, so you will have a new mortgage refinance rate, new terms, and a new monthly payment. You will also need to pay closing costs, which Freddie Mac estimates cost about $5,000. However, your exact refinancing closing costs will depend on factors like your location and the amount you are borrowing.

3. Buy out your spouse

If one spouse wants to cash in on their investment in the home and the other wants to stay, a buyout is an option. With a buyout, you could pay your spouse in cash for their portion of the home (if you have it) and then refinance the mortgage into your own name or pursue a loan assumption or modification as outlined below.

For example, your home is worth 400,000,andyourremainingmortgageprincipalis400,000, and your remaining mortgage principal is 400,000,andyourremainingmortgageprincipalis250,000. This means you have 150,000inequity.Ifyousplittheequityinhalf,youwouldpayyourex−spouse150,000 in equity. If you split the equity in half, you would pay your ex-spouse 150,000inequity.Ifyousplittheequityinhalf,youwouldpayyourex−spouse75,000 for their half of the existing equity and get to stay in the home.

Most consumers need a cash-out refinance to handle a buyout. This allows you to turn some of your home equity into cash, which you can then use to pay your former spouse for their share of the home.

4. Assume the mortgage

If you don’t want to refinance (or can’t qualify on your own), you may be able to do a mortgage assumption. This is when one of you assumes responsibility for the other spouse’s share of the debt. To do this, the staying spouse would likely need to show that they have the finances to cover the existing loan payments on their own.

Loan assumptions require you to stay with the same mortgage company — as you’re assuming the same mortgage loan and terms — so check with your lender to see if they offer this. (Not all companies do.)

5. Modify the loan

Some lenders also offer loan modifications, which allow you to change the terms of your existing mortgage. If you choose this option, you would need to release your former spouse from all liability for the loan and provide a copy of your divorce decree. You may also be able to change the rate, payment, and other loan details during modification.

Again, loan modifications can only be made to your original loan and with your existing mortgage lender. You'd need to refinance your mortgage to get an entirely new loan or lender.

6. Keep things as-is

You can technically keep the mortgage as-is after divorce, but you’ll need a clear strategy for who will handle payments each month. You’ll also need to trust your spouse immensely, as any late or unpaid payments can hurt both people’s credit scores or lead to foreclosure.

Keeping you both on the mortgage could also impact your ability to buy a new house post-divorce, as it would mean leaving a large debt on both of your credit reports. (And debt-to-income ratio plays a big role in mortgage qualification.) Make sure you talk this through with a mortgage professional if one of you plans to buy a new property after your separation.

How to make the right decision about your mortgage when getting divorced

The best path forward depends on your goals and finances and those of your former spouse. If you want to keep the home and can afford to make payments alone, refinancing the loan into your own name may be the best choice. But if you have a poor credit history or lack the income to cover payments solo, you may need to explore other options.

All in all, you should think about the following factors when deciding how to handle your home loan post-divorce:

If you’re not sure what to do, your best bet is to work with a knowledgeable attorney, real estate agent, and mortgage professional. They can give you guidance based on your personal financial situation, local market, and post-divorce plans.

Learn more: 9 options to refinance a mortgage with bad credit

Divorce and mortgage FAQs

What happens to a mortgage during divorce?

When divorcing couples have a joint mortgage, both are still responsible for repaying the loan. You may choose to refinance the home loan into just one of your names, or your lender might allow you to assume your spouse’s share of the loan. Selling the house and paying off your mortgage is also an option.

How can you keep your house in divorce without refinancing?

You may be able to assume your spouse’s share of the loan if your mortgage lender allows it. This typically requires showing you have the financial capabilities to make payments on your income alone.

Does my spouse still have to pay the mortgage if they leave?

If both of you are named on the mortgage, you are both responsible for repaying the loan — regardless of who lives in the home. Failing to make payments will hurt both people’s credit scores and potentially lead to foreclosure.

This article was edited by Laura Grace Tarpley.