June 22, 2016 by Leave a comment

The path to a clean divorce is riddled with obstacles. If not handled correctly, a mortgage can be the last holdout linking your finances with your ex-spouse. Regardless of financials, divorce can be an exhausting and emotionally draining process. Now, what to do about it?

As we noted in a blog post last year, refinancing after divorce is difficult. More than any other financial investment, a mortgage is truly the biggest hurdle on your path toward independence. Because the house is the largest asset for most families, it is a ripe bargaining chip for divorce settlements. The mortgage becomes a liability as opposed to an asset. “Divorcing” your mortgage is not an easy process—in the eyes of your mortgage lender, you remain married and responsible for the mortgage until you decide to refinance or sell.

Is It Worth Leaving Your Ex?

What comes next is a chance to perform a cost-benefits analysis on your situation. If you are close to paying off your mortgage, is it worth staying on the loan? If you are far away from repayment, is there a way to get to equity and cash out?

This decision is no simpler when it comes to occupancy issues. Who gets to keep the marital house?

Who Gets What in the Divorce?

With or without children, the social and economic anxieties of divorce can be taxing. Even when it’s an amicable split, divorcees must grapple with the negotiating terms of settlement: alimony payments, custody battles, and liabilities. When it finally comes to divorcing the mortgage, many people would rather surrender the house and save themselves another battle. On the other hand, some divorcees decide to ride out their mortgage together, cohabitating until they have repaid the loan.

Why Would Anyone in Their Right Mind Want to Live With Their Ex? 

It’s hard to tell, but as New York Magazine reported, couples who undergo this special form of purgatory usually do so for the benefit of children. Otherwise, couples will choose to cohabitate for financial reasons. This is yet another reason to avoid becoming house poor and keeping some money stashed away in your own savings account. And even if it is for the benefit of children, the cohabitation situation is bizarre. We see it again and again on television sitcoms and big screen movies, from The Real O’Neals to the 2006 film The Break-Up starring Jennifer Anniston and Vince Vaughn. Today, more people are simply grinning and bearing it.

Fortunately, you are not Jennifer Anniston’s character from the film. With a little guidance you can navigate both divorce and refinancing your mortgage.

Going Solo to Refinance Your Mortgage 

The hard truth is that there is only one way to remove your spouse’s name from the mortgage: you must refinance the mortgage in your name only. Since you had originally applied with two names (and two salaries) the lender needs to recalculate the loan’s interest rate for a single payer.

Just as before, you will have to pass the lender’s eligibility test on your own merit. Due to the hit on your combined income, you may have to make a larger down payment or ask for a cosigner. Remember, the mortgage cannot be more than 28 to 30% of your gross income, and your total monthly debt payments cannot exceed 43% of your gross income. They will also factor in child support and alimony payments.

If you can pass each of the lender’s eligibility requirements, then you move on to your final challenge: the quitclaim deed.

A quitclaim deed transfers the ownership of a property without it being sold. The same type of deed is used if you want to add someone to the deed, like a new husband or wife in the future. No money is involved here, but you will need your ex-spouse to sign the deed in the presence of your lender for it to be valid. Remember! The quitclaim deed only refers to ownership. You still need to refinance your mortgage for your spouse to be taken off of payments.

Give Me Equity or Give Me Death

If you choose to go the equity route, it involves more number crunching than tactics. For example, if you and your spouse own a house valued at $500,000 with an outstanding mortgage balance of $100,000 both of you could split the property’s equity 50-50 for a clean $200,000 each. (The other $100,000 from the house sale would finish off the loan.) Your share of equity is determined by premarital assets, if the home is covered in a prenuptial agreement, and whether you made any improvements to the property.

In cases of property and divorce, laws vary dramatically. Be sure to attain legal advice before taking any of these steps. Because of how costly and meticulous the path toward independence can be for soon-to-be divorcees, it is important to have a true understanding of your financials.

Take the time to think of worst case scenarios. Will the divorce be amicable? Can you and your ex decide on an equity agreement? With a mortgage, the best you can hope for is that they will.

Thomas began his mortgage career in San Francisco, California in 2003 after serving in the United States Army, and has over 10 years of experience in the mortgage industry. Contact Thomas by phone at 203-707-5728, or by email at [email protected] NMLS # 202157.


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