Divorce and mortgage: What are your options?

By: Dan Rafter Updated By: Ryan Tronier Reviewed By: Paul Centopani
November 23, 2023 - 14 min read

How to choose the best divorce mortgage strategy for you

Divorce and mortgage considerations often add complexity to an already challenging process. With a joint home loan in the mix, navigating a divorce requires careful planning.

Yet, proven divorce mortgage strategies can assist both parties. These strategies vary, depending on the home’s equity, the purchase and title details, and if one spouse intends to retain ownership. Despite the intricacies, the right approach can resolve nearly any scenario involving a mortgage during a divorce.

Talk to a lender about your divorce mortgage options. Start here

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>Related: Cash-out refinance: Best uses for your home equity

Your divorce mortgage options

During a divorce determining who gets the house is often among the greatest choices, and it often hinges on the details of your divorce and mortgage situation.

If your name isn’t on the mortgage, understanding your rights is essential. Moreover, it’s important to grasp how a divorce impacts your home loan and the divorce mortgage responsibilities that come with it.

1. Refinance the current mortgage

During a divorce and mortgage, the cleanest solution is often to refinance the existing mortgage and leave only one spouse’s name on the loan.

After the mortgage refinance closes, only the person named on the mortgage would be responsible for making the monthly payments. The person no longer named on the mortgage could then be removed from the home’s title.

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If necessary, a cash-out refinance could pay the portion of equity that is due the departing spouse.

Refinancing into a new mortgage could be the simplest solution, but it works only when one spouse can qualify for the loan on their own. Mortgage eligibility will depend on:

The borrower’s income

Qualifying for a mortgage as an individual may be harder than qualifying as a married couple. Why? Because a single borrower often makes less money than a couple.

During the underwriting process, the lender will verify the single borrower’s income and compare it to his or her monthly debts, including credit card minimum payments and car payments.

If the single borrower’s income can support the new loan’s mortgage payment, then refinancing is a viable option.

The borrower’s credit score

The person refinancing the mortgage loan must have a high enough credit score to qualify. You can see credit score requirements to refinance here.

If your credit scores have fallen since you took out the current mortgage loan, you may no longer qualify for a refinance. You may be able to 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 which could take months, a year, or even longer.

Home equity

If you bought the home recently and made a small down payment — or if you already have a second mortgage that uses home equity — your home may not have enough equity for a mortgage refinance.

Lenders often want to see at least 3% in home equity before approving a refi. Equity measures the part of the home’s value that’s already paid off. It’s the value of your home minus the current mortgage balance.

Lenders may call this your loan-to-value ratio, or LTV. A home with 3% equity would have an LTV of 97%.

If equity is a challenge for you, the following loan options may help.

2. Refinancing with low home equity

Certain refinance types allow you to remove a spouse’s name from the original mortgage, despite a home’s low equity position.

Verify your refinance eligibility. Start here

FHA Streamline Refinance

If you already have an FHA loan on the home, you can use the FHA Streamline Refinance to remove a borrower without checking home equity. However, the remaining spouse must show that they have been making the entire mortgage payment for the past six months.

A Streamline Refinance is best for those who have been separated for at least six months. But it is not ideal if your settlement agreement requires you to resolve your divorce and mortgage situation right away.

VA Streamline Refinance

VA loan holders can use a VA Streamline Refinance to remove a spouse’s name from their current VA mortgage after a divorce. Typically, the spouse who is a veteran must remain on the home loan.

Only military personnel and veterans can use VA loans. So if the departing individual is the veteran, the remaining spouse would have to refinance into another loan type.

If the remaining spouse is eligible for a VA loan, they may also opt for a VA cash-out loan. This option allows homeowners to take out a new loan amount of up to 100% 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 to the divorce and mortgage decree.

USDA Streamline Refinance

Loans backed by the U.S. Department of Agriculture, known as USDA loans, can also qualify for Streamline Refinancing.

Just like VA and FHA loans, a USDA Streamline Refi works only if you already have a USDA loan. USDA loans work in rural and suburban areas and only for borrowers who fall within income limits.

Conventional refinance

Conventional loans do not offer a Streamline Refinance option. However, it’s still possible to refinance a conventional loan with low home equity.

Fannie Mae and Freddie Mac — the two agencies that regulate most conventional loans — only require 3% equity in the home to refinance. That means your LTV must be 97% or lower.

Keep in mind that these rules can vary by lender. Some may require a higher level of equity to refinance than Fannie and Freddie’s minimum. So if low equity is a concern for you, shop around with a few lenders to find one that’s more forgiving.

Verify your refinance eligibility. Start here

3. Buy out your ex-spouse’s share of the home equity

In many states, courts will split the built-up equity in a home between the two divorcing partners. If you’re keeping the home and you don’t have enough cash to buy out your ex-spouse’s share, you’ll need to use the home’s equity for a “divorce and mortgage” buyout agreement.

Review your home equity lending options. Start here

A home equity loan or HELOC could access your equity without refinancing the first mortgage. So, if you got a great interest rate during the pandemic, you could keep it.

You’d keep making your current mortgage payment and you’d add a second monthly payment to pay off the home equity loan. Closing costs are low and these loans are faster and easier to get than a primary mortgage.

4. Sell the home

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

Talk to a lender about your divorce and mortgage options. Start here

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

This is a last resort for a lot of married couples because it means both spouses have to move. And, it means cashing out a real estate investment. If the housing market in your area has cooled, you could lose money.

Equity is also important when selling. It typically costs between 7% to 10% of your home’s value to sell. This total consists of agent fees, taxes, title insurance, and other closing costs.

In other words, you may have to sell a home for $330,000 to break even if you owe $300,000. Otherwise, you might need to come in with a check at the closing of the sale.

If you can’t sell your home or refinance your mortgage loan, there is one more option. But it can present new risks to your divorce and mortgage agreement.

5. Keep the home and mortgage

If you’re not willing or able to sell or refinance the marital home, your other choice is to keep the home and the mortgage intact. But this can be risky: Both parties would remain on the existing loan and be liable for the payments.

You’ll need specific language in the divorce agreement about who will make the mortgage payments each month. Maybe your former partner will pay the mortgage, even though you and your children will be the ones living in the home.

Or, the divorce settlement could require you and your ex-spouse to pay half of the mortgage each month.

Risk to future home loan eligibility

Keep in mind that leaving your ex’s name on the mortgage post-divorce may impact their ability to buy a new home in the future.

A borrower’s debt-to-income ratio (DTI) is crucial when qualifying for a new mortgage. When a potential home buyer is listed on another mortgage, that debt appears in their DTI and could affect the new loan application — even if they aren’t actually making payments on the existing mortgage.

Risk of missed payments

This situation can also lead to missed mortgage 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 score on your credit report could fall by as much as 100 points.

In a dire divorce and mortgage situation, you could lose the home and its value to foreclosure.

Both partners are still jointly liable

Remember that when your name remains on the loan, your mortgage lender considers you equally responsible for making the payments each month.

Your mortgage holder will not dismiss late payments, even when your divorce attorney has negotiated your ex-spouse’s responsibility in the settlement agreement.

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

What happens if I can’t refinance after a divorce?

Refinancing starts you over with a new mortgage after a divorce. But if you can’t qualify for a refinance — or if you’re worried about today’s mortgage rates increasing your monthly payments — you’ll have options.

You might sell the property and split the proceeds, or arrange to buy out your ex-spouse’s equity in the home. This decision requires careful consideration of both your divorce and mortgage situations.

It’s essential to assess the financial implications of each option, ensuring you make a choice that aligns with your long-term stability and aligns with the terms of your divorce mortgage agreement.

Should you refinance or sell when dealing with a divorce and mortgage?

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 mortgage refinance is complete, it will remove your spouse’s name from the mortgage.

Compare refinance rates from multiple lenders. Start here

Your divorce settlement might state that your ex-spouse will keep making the mortgage payments until the refinance officially closes, and you are no longer responsible for the original mortgage.

You might provide additional protection for yourself by requesting your divorce attorney to insert a clause in your settlement agreement. It would say that if your ex-spouse doesn’t close the refinance during a certain period, the spousal 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 and mortgage settlement includes 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.

Divorce and mortgage: Key financial concerns

When you’re untangling your life from your spouse’s, understanding the financial implications for handling your mortgage during a divorce is important. It’s not just about splitting assets; it’s also about securing your personal finances.

Check your refinancing options. Start here

Here are a few steps you can take to protect yourself financially when dealing with a divorce and mortgage.

Determine your home equity

If you’re looking to either refinance your joint mortgage or put your house on the market, get a professional appraisal to establish exactly how much equity you have. This can give you a clear starting point for negotiations.

Disagreements over the appraisal value can stall the process, leading to additional legal and appraisal fees. It’s practical for both parties to settle on a single appraiser and agree to stand by the appraised value.

In the case of a home sale, you may choose to divide the equity after deducting closing costs, home repairs, and improvements, or you might opt to use it to clear joint debts. Some separating couples agree upfront to accept an initial offer on their property, as long as it falls within a specified range of the asking price.

Protect your credit history

Divorce and mortgages can be emotionally charged, and letting those feelings influence financial decisions can lead to detrimental outcomes. Sometimes, spouses may intentionally skip payments on joint accounts out of spite, which can severely damage both parties’ credit scores and hinder their ability to get a mortgage in the future.

It’s important to stay on top of all bill payments throughout the divorce to safeguard your credit score. It’s also wise to close any joint accounts and establish individual ones to prevent disputes over who is responsible for the payments, as any negative marks on your credit report could make loan approval more challenging.

Tax implications of divorce and mortgage

Selling your home during a divorce or purchasing your spouse’s share might trigger capital gains tax if the profit exceeds the exempted amount. This tax applies to profits from selling assets like a house.

When you sell, you and your spouse could deduct up to $250,000 each from your taxable income, provided the home was your primary residence and you lived there for at least two out of the last five years before selling.

Regarding alimony, post-2018 divorce agreements stipulate that the higher-income spouse who pays alimony cannot deduct it from their taxable income, and the recipient does not have to report it as income.

This could prompt the higher-earning spouse to argue for lower alimony since it affects both the payer’s ability to secure a mortgage and the recipient’s capacity to afford the home and its associated costs.

*Please note that this information is not intended as tax advice, and you should consult a tax professional for guidance on specific situations.

FAQ: Divorce and mortgage options

Review your divorce mortgage options. Start here

How long do you have to refinance after divorce?

The divorce mortgage settlement should set the deadline for refinancing. As you negotiate the details of your divorce and mortgage, make sure the deadline to refinance is reasonable. Some settlements call for the home to be sold if it’s not refinanced on time.

What if one spouse wants to keep the marital home, but is unable to qualify for a refinance?

If one partner wants to remain in the home as their primary residence, but refinancing the divorce mortgage isn’t possible, the spouse may want to pursue financial assistance such as alimony or child support as a source of income. Although, this type of arrangement can be risky. When an ex-spouse doesn’t make the agreed alimony payments or child support payments, the mortgage holder is still responsible for making the monthly mortgage payments.

Can I take my former spouse off of the mortgage?

Even if you and your partner come to an amicable divorce and mortgage agreement, most lenders will not remove a co-borrower from an existing loan. Instead, they require origination of a new loan based on the sole borrower’s credit and income. That typically means refinancing.

What is a quitclaim deed?

A quitclaim deed allows you to remove a person’s name from a deed by transferring ownership from one party to another. This property transfer is also called a quick claim deed because it’s generally a fast and easy method. However, any type of deed transfer affects only ownership — it won’t change whose name is on the mortgage.

Can my ex claim ownership if the home is already in my name?

Maybe, but it depends on your divorce and mortgage situation. Several states — including California, Washington, Texas, and Arizona — are known as “community property” states. In these states, property acquired during the marriage belongs to both spouses, even if only one spouse’s name is on the mortgage. Your divorce attorney will know the nuances of your state’s laws.

Do you have to tell your lender about the divorce?

Yes, you should tell your lender about your divorce and mortgage situation. Many people do not want to talk about an ongoing divorce, but it’s important to inform your lender to protect everyone’s financial well-being. Relying on an ex-spouse to follow through with their share of the mortgage payment is a risky decision that could negatively impact credit scores or worse.

What are current refinance rates?

The bottom line is that navigating a divorce and mortgage scenario doesn’t mean you have to give up on your homeownership goals.

Refinancing is a common method to remove an ex-spouse’s name from the mortgage, and it can also provide cash to cover your ex’s portion of the home equity if needed. While refinance rates have increased, they still depend on the borrower’s credit score and loan terms.

It’s wise to seek a mortgage pre-approval to understand the deals available for your divorce mortgage situation. You can get started today by clicking on the links below.

Time to make a move? Let us find the right mortgage for you

Dan Rafter
Authored By: Dan Rafter
The Mortgage Reports contributor
Dan Rafter has written about mortgage topics for more than 20 years. His stories have appeared in the Washington Post, Wise Bread, the Motley Fool, Fox Business, and more.
Ryan Tronier
Updated By: Ryan Tronier
The Mortgage Reports Editor
Ryan Tronier is a personal finance writer and editor. His work has been published on NBC, ABC, USATODAY, Yahoo Finance, MSN Money, and more. Ryan is the former managing editor of the finance website Sapling, as well as the former personal finance editor at Slickdeals.
Paul Centopani
Reviewed By: Paul Centopani
The Mortgage Reports Editor
Paul Centopani is a writer and editor who started covering the lending and housing markets in 2018. Previous to joining The Mortgage Reports, he was a reporter for National Mortgage News. Paul grew up in Connecticut, graduated from Binghamton University and now lives in Chicago after a decade in New York and the D.C. area.