Curve

Divorce and mortgage: Your options when separating

Dan Rafter
The Mortgage Reports contributor

Divorcing with a mortgage is a common challenge

Divorces are anything but simple.

Complicating the process are decisions about your co-owned home and mortgage.

You’re not alone in this challenge. According to the Centers for Disease Control and Prevention (CDC), nearly 800,000 couples divorced in 2017, the most recent year for which data is available.

Roughly 60 percent of the U.S. population owns a home, meaning a majority of divorcing couples must make tough housing decisions.

There are time-tested options for the mortgage that will help both parties move on after separation. These options depend on factors such as home equity, credit scores, and whether one party wants to remain in the home.

Almost any situation can be remedied by one of these options.

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Refinance the mortgage

The cleanest solution could be to refinance the mortgage and leave only one person’s name on the loan.

After the refinance closes, only the person whose name is on the mortgage would be responsible for making the monthly payments.

You could then take the name of the person who won’t be making the mortgage payments off the title of the home.

If necessary, use a cash-out refinance to pay out the portion of equity due the departing individual.

That’s the simplest solution, but it only works if certain conditions apply. There are at least a few issues that can stop you from completing a refinance.

Income. You might not have the income to pay the mortgage on your own. You find that the lender will not approve the loan for a single-income household. Unless you can increase your income quickly, you may have to sell the home.

Credit. Maybe your credit scores have fallen since you took out your original mortgage loan. You might no longer qualify for a refinance. You can overcome a low credit score with a rapid rescore, but success using that method is far from certain. Often, the only “fix” for a low credit score is to rebuild credit history over a long period of time.

Equity. If you recently purchased or bought the home when values were higher, your home may not have enough equity to refinance. For instance, if you have built only a few percent in equity, a refinance could be cost-prohibitive or altogether unavailable. Fortunately there are mortgage options that can help you deal with a lack of equity.

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Removing the spouse if you have low home equity

Certain refinance types allow you to remove a borrower despite the home’s low equity position.

FMERR refinance to remove a spouse

The Freddie Mac Enhanced Relief Refinance, or FMERR, might work if you purchased your home after October 1, 2017 and the mortgage is at least 15 months old. This loan is available only to borrowers with a Freddie Mac loan, but a similar program is available if your loan is owned by Fannie Mae.

The remaining spouse will have to re-qualify for the loan to prove they can make the payments without the assistance of a co-borrower. A minimum 620 score is required.

You won’t be able to get cash out with this loan. It would strictly be a tool to remove one spouse from the loan.

Start your FMERR eligibility request here. (Sep 16th, 2019)

FHA streamline refinance

If you purchased or last refinanced your home with an FHA loan, you are permitted to refinance to remove a borrower.

However, the remaining spouse must show that he or she has been making the entire mortgage payment for the past six months. This option is best for those who have been separated for at least this long.

But it is not a ideal if you need to finalize your mortgage situation right away.

Learn more about the FHA streamline refinance.

VA refinance loans during divorce

You can use a VA streamline refinance to remove a spouse after a divorce. Typically, the veteran must remain on the loan.

If the departing individual is the veteran, the remaining spouse would have to refinance into another loan type.

However, if the remaining spouse is eligible for a VA loan, he or she may opt for a VA cash-out loan. This option allows homeowners to open a loan of up to 100 percent of their home’s current value.

This feature could enable the remaining spouse to pay out the departing partner’s equity in the home according the divorce decree.

There is no shortage of refinance options in the face of divorce. But if you can’t refinance for whatever reason, then you’ll need to find another solution.

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Paying off the spouse for their share of the home equity

In many states, the court will split the built-up equity in the home between the two divorcing partners.

There are a number of tools you can employ to raise cash to “buy out” the spouse so you can keep the home.

If there’s equity in the home, consider a home equity loan. You won’t have to refinance the first mortgage. It’s simply a 2nd mortgage added to the existing loan. Closing costs are low and these loans are must faster and easier to get than a primary mortgage.

If there’s little or no equity in the home, one option is a personal loan. Personal loans don’t depend on your home for approval, but your past credit history and income situation.

Loan amounts go up to $50,000, but up to $100,000 in some cases. Approval happens in days, not weeks, and the home is not put up as collateral.

In all, a personal loan might be a quick way to raise cash to pay off the departing spouse’s share of the equity.

Check my rate for a personal loan up to $100k * (Sep 16th, 2019)

*TheMortgageReports and/or our partners are currently unable to service the following states – MA, NV

Sell the home

Selling the home is another option. You and your spouse would agree to place the home on the market and then split the profits when it sells.

You would still need to determine how mortgage payments are handled before the sale closes, but this is a short-term rather than a long-term challenge.

Again, though, this solution might not work in a divorce case.

Maybe you and your spouse have children, and you don’t want to force them to move out of the home in which they’ve grown up. Or, the real estate market in your area is a weak one, and you’re afraid you’ll lose money if you sell.

Equity is important when selling. It typically costs between seven and ten percent of your home’s value to sell. This total consists of agent fees, taxes, title insurance, and other fees.

In other words, you may have to sell a home for $220,000 to break even if you owe two hundred thousand.

Otherwise you might need to come in with a check at closing of the sale.

If you can’t sell your home or refinance your mortgage loan, there is one more option. But it is not without its risks.

Keep the home and mortgage

If you’re not willing or able to sell or refinance your home, your other choice is to keep the home and the mortgage intact.

Both parties remain on the loan and liable for the payment.

This requires specific language in the divorce agreement about who will make the mortgage payments each month. Maybe your agreement will state that your former partner will pay the mortgage, even though you and your children will be the ones living in the home.

The agreement might state that you and your former partner will pay half of the mortgage each month.

Keep in mind that this situation can lead to missed payments if your former partner won’t or can’t abide by the divorce decree.

Say your former spouse is supposed to pay the mortgage each month, but your name remains on the loan. If your former partner misses a payment, your three-digit FICO credit score could fall by as much as 100 points.

When your name remains on the loan, your lender considers you equally responsible for making the payments each month.

Your mortgage holder will not dismiss late payments, even with a divorce decree that states your ex is responsible.

For this reason, a shared mortgage after a divorce might only work well in amicable divorces.

Protect your credit

You can take certain steps to protect yourself.

The divorce papers could state that your former spouse will live in the home and apply for a refinance at a certain point. When the refinance is complete it will remove your name from the mortgage. Your divorce agreement might state that your ex will keep making his or her payments until the refinance officially closes and you are no longer responsible for the mortgage.

You might provide additional protection for yourself by inserting a clause in your divorce agreement. It would say that if your ex doesn’t close the refinance during a certain period, the home that you once lived in will be put up for sale.

Remember, though, that no matter what your divorce papers say, you can never fully protect yourself from the actions of your former partner when a mortgage is involved. Even if the divorce papers include penalties, there is no guarantee that your ex will keep making those payments.

Divorcing couples who want the safest option for all parties may want to sell the home or refinance the mortgage.

What are current rates for a divorce mortgage?

Divorce is complicated, but it does not have to be an end to your homeownership goals. Today’s low refinance rates make it more feasible to take on the entire mortgage payment for a divorcing party who wishes to stay in the home.

Check today’s rates and get a trustworthy assessment of all your options. Then make an informed decision on how you will move forward.

Verify your new rate (Sep 16th, 2019)