A lot of homeowners look forward to refinancing their mortgages. It’s a way to get a cheaper interest rate and a lower payment.
However, if you’re going through a divorce, refinancing your home loan might be bittersweet. Your marriage is ending, and if both of your names are on the mortgage loan, one spouse will have to buy out the other.
It’s a difficult time, but there’s plenty to consider before, during and after a divorce when refinancing.
1. Who will keep the property?
Unlike renters, you and your spouse can’t give the mortgage lender a 30-day notice and then go your separate ways. It’s a little harder to move on from a relationship when you own property together.
You and your spouse need to talk and figure out what to do with the house. Selling the property and splitting the profit might be the best way to proceed. On the other hand, if you have children, the spouse with primary custody may choose to live in the house and keep the kid’s life as normal as possible. This can work, but you’ll have to refinance the mortgage loan since this is the only way to remove a co-borrower’s name from the loan.
2. How’s your credit history?
If you decide to keep the house, you’ll need to qualify for the mortgage on your own, which means having a high enough credit score to meet the lender’s requirements. You can get a mortgage refinance with a credit score as low as 620, but you’ll also pay a higher mortgage rate. For the most favorable rates, you’ll need a credit score in the 700 or 800 range.
Unfortunately, you won’t be able to refinance the house if your credit needs a lot of work. If your ex isn’t in a rush to remove his or her name from the mortgage, you can use this time to build your credit score and then apply for a refinance in six months to 12 months. You can increase your credit score by:
- Paying all your bills on time
- Paying down consumer debt
- Limiting the number of credit inquiries
- Fixing errors on your credit report
3. Can you afford the house?
Even with a perfect 850 credit score, the bank will look at your income to make sure you can afford the new mortgage on your own. Before, the lender probably used your combined incomes to determine affordability. Now that you’re on your own, the mortgage payment cannot be more than 28 percent to 30 percent of your gross income, and your total monthly debt payments cannot exceed 43 percent of your gross income. Lenders also factor in other monthly income you receive, such as child support or alimony.
4. Signing a quit claim deed
If you’re able to refinance and remove your spouse’s name from the mortgage loan, he or she also needs to sign a quit claim deed, which transfers ownership of the property to you. Refinancing takes a name off the mortgage loan, but not the title.
Divorces can be mentally and emotionally exhausting, and refinancing a mortgage at the same time can add to your stress. However, if you’re able to qualify for a new mortgage on your own, refinancing can provide a fresh start for you and your family.