Breaking up (with your mortgage) is hard to do
You and your spouse decide to part ways. Your “ex” will keep the dog and the bedroom furniture, while you get the house. But there’s a problem. In the eyes of your mortgage lender, the “ties that bind” aren’t legally severed until you remove your ex from the mortgage.
Even when a couple agrees that one person is no longer responsible for the mortgage, the lender doesn’t see it that way until the official records show it.Need a refinance to remove your ex? Start here. (May 26th, 2020)
In this article:
- 4 ways to remove an ex from a mortgage
- Refinance the loan in your name only
- Sell the house
- Apply for loan assumption
- Get an FHA or VA streamline refinance
Even divorce court can’t change the terms of your loan
As far as lenders are concerned, both people remain “jointly and severally” liable for the loan. In other words, the lender can come after both – or either – of you in the event of a default. (And both of your credit scores will take a hit if your payment is late.)
The only legal way to take over the loan is to get your ex-spouse’s name off the mortgage.
4 ways to remove an ex from a mortgage
There are four ways to remove an ex-spouse from a mortgage. Some are fairly easy and simple. Others require more work and hassle.
Unfortunately, the solutions involving more work and hassle are often the best ones.
1. Refinance the loan in your name only
This may be the best solution, but it can also be quite labor-intensive.
If you have sufficient equity, credit and income, and your ex-husband or ex-wife agrees to give you the house, you should be able to refinance.
However, many lenders will want you to prove that you can make mortgage payments by yourself. That’s where the labor comes in. You’ll need to fill out applications and supply paperwork to document your assets, income, debts and credit history.
Sometimes, this can be as easy as handing over a couple W-2s and pay stubs plus a few months’ bank statements.
“Cashing out” the spouse
You may have to “cash out” your spouse, meaning giving them 50% of the equity in cash, for them to agree to be removed from title. In those cases, try a cash-out refinance. If there’s little equity in the home, you won’t qualify for a cash out. You might try a personal loan, which is not based on the property but your credit and income profile. Personal loans can be had up to $100,000. If this is the only way to “cash out” your spouse, it may be worth it.
Removing the spouse from the deed
Once the lender approves your refinance, you should also get your spouse’s name off the deed. You usually do this by filing a quitclaim deed, in which your ex-spouse gives up all rights to the property.
Your ex should sign the quitclaim deed in front of a notary. One this document is notarized, you file it with the county. This publicly removes the former partner’s name from the property deed and the mortgage.Start a refinance to remove an ex-spouse here. (May 26th, 2020)
2. Sell the house
The easiest fix is often to sell the house and split the proceeds with your ex-partner. This may be easier said than done. It could be next to impossible if there’s a current “buyer’s market” or if you owe more on the mortgage than the house is worth.
If the mortgage is underwater, you may have to opt for a “short sale.” This is a property sale in which the net proceeds don’t cover all the loans on the property. This option has many drawbacks.
Fortunately, many housing markets have recovered, and sellers are getting higher prices than they have been in many years.
If you’re unlucky, your mortgage lender can sue you for the difference between the foreclosure sale proceeds and the loan balance. This is called a “deficiency,” but in many states, lenders can’t come after you for this.
And even if the lender releases you from liability, your credit score and your spouse’s will be negatively impacted by a short sale.
3. Apply for a loan assumption
In theory, this is the simplest solution of all. You inform your lender that you are taking over the mortgage, and you want a loan assumption. Under a loan assumption, you take full responsibility for the mortgage and remove your ex from the note.
The terms of the loan remain the same. The only difference is that you are now the sole borrower. (And if your ex is the one who got the house, your credit – and finances – are protected if your former spouse fails to make payments.)
Be sure to ask the lender if you can obtain a release of liability. This will eliminate your obligation to repay the loan if your ex fails to.
The problem here is that many lenders won’t agree to a loan assumption. And lenders that do agree may demand evidence that the remaining borrower can afford the payments.
A loan assumption isn’t free. It can cost one percent of the loan amount, plus administrative fees of $250 to $500.
4. Get an FHA or VA streamline refinance
If you have an FHA-backed mortgage, apply for an FHA streamline refinance. This lets you take a borrower off the mortgage and reduce the size of your monthly payments if current rates are lower.
In many cases, you can get a streamline loan without having to submit income documentation to requalify. To get such a refinance, you must usually prove that:
- You acquired the home and FHA loan more than six months ago
- You’ve made at least six payments by yourself
To get a streamlined refinance without an appraisal, you can’t wrap the refinance costs into the new loan.
If you assumed the loan less than six months ago, or haven’t made payments alone for at least six months, income requalification may be necessary.
When trying to remove a spouse from a VA-backed mortgage, the VA streamline refinance requirements are similar.
As a rule of thumb, an eligible veteran must remain on the loan. After all, the VA mortgage program was designed for veterans and their families – not the former spouses of veterans.
A final (risky) option
There is one final option, but it’s risky, and should only be used as a last resort.
You and your ex can agree to both keep making payments on the mortgage.
This could work if both people decide to continue living in the house. That way, both parties have an incentive to stay current with the payments.
Otherwise, experts do not recommend this approach. If either person stops making payments, the house could go into foreclosure and the credit scores of both will take a nosedive.
The first four options require more work, but the odds of a successful outcome are much higher.
What are today’s mortgage rates?
Today’s mortgage rates for those refinancing out of a joint loan — or just buying or refinancing property – are still very attractive. And you can get a better deal by shopping with several competing mortgage lenders.Get started on your refinance to remove a spouse here. (May 26th, 2020)