Common Divorce & Mortgage Questions Answered
Going through a divorce is never easy.
You have the heartache of a relationship that hasn’t worked out, and you then have to deal with splitting up your marital assets.
If you are lucky, your relationship will have ended amicably, and you may both want to split your assets on a 50-50 basis.
For many, though, they have a bit of a battle on their hands to retain what they believe is rightly theirs.
If you and your partner purchased a property together, deciding on what to do with the house and mortgage financing can be a nightmare.
Several different factors are at play. For example, whether one partner wants to stay in the home and how the property was titled and financed will be important as the former couple moves forward.
To help people better understand how this works, we explain everything you need to know about divorce after buying a home and what the next steps may look like below.
Who really owns the property after a divorce?
The division of property is complicated.
Rules regarding homes, mortgages, and divorce differ based on the state you are in and whether that state is a community property state.
Community property states
In community property states, every spouse is entitled to 50 percent of the property’s value, assuming it was co-owned.
Community property states are:
- New Mexico
Equitable distribution states
All other states are equitable distribution states. This means the people involved in the divorce or the court can determine the fair distribution of assets.
Should the court feel that one spouse is more educated or employable, they may get fewer assets because they can easily earn more money after the divorce process.
If the divorce has happened due to infidelity, then the unfaithful spouse may get a lower percentage of the property’s value.
Will you need to sell your property in a divorce?
It is not a requirement to sell your property.
However, many couples decide to do so, as it reduces complications.
The truth is, though, that it is completely up to the divorcing couple. You can privately divide assets without the help of the courts and attorneys.
It is not unheard of, though, for couples to come to their own agreement and decide that one person deserves the property for their own reasons.
If one spouse decides they are going to keep the property and the other leaves, the staying spouse will usually need to buy out the leaving spouse.
If they do not intend to sell the property, obtaining an appraisal is necessary to determine how much the leaving spouse is owed. After all, it is likely that the property’s value is different now than it was when you first bought it.
Once you know how much the property is worth, you can organize a divorce mortgage buyout.
How to divide assets when getting divorced
No matter what route is ultimately chosen, it is important to take some preliminary steps to be armed with all the information you require.
- Make a list of all of your assets
It is vital to make a complete and transparent list of all of your assets.
While you may be tempted to hide an asset or two, it is really not worth it. If your ex-partner later discovers that you failed to disclose an asset during the divorce, the judge may decide to open the case again and re-assess the division of your property.
If that was not bad enough, you might face other penalties. After all, hiding assets to shield them from property division is against the law.
- Get large assets and property value
When determining the value of each asset, the fair market value is a good place to start.
This refers to the price that you could sell your home for on the market today rather than how much you paid for your home.
You can usually get a good understanding of this by doing your research online. However, hiring an appraiser really makes the most sense with assets such as properties.
- Determine which assets are marital and which are separate
If you claim that an asset you obtained during your marriage is separate property (i.e., wholly yours), you will need evidence to back that up.
Taking these preliminary steps is important because you will want to have a full picture of your assets before you determine the best outcome in terms of property division for you and your ex-spouse.
Refinancing your current mortgage is often the easiest approach for a fair split of equity following a divorce
Refinancing is typically the cleanest approach if you are wondering what to do about your mortgage when getting divorced.
You can refinance so that only one person’s name is left on the loan.
After the refinance closes, only the person with their name on the mortgage will be responsible for making the monthly payments. The person who is not on the mortgage will be removed from the home’s title.
While this is the simplest solution, one spouse must qualify for the loan by themselves.
Three key factors will determine whether or not the spouse is eligible for a mortgage on their own:
- Home equity
If you recently purchased a property and made a small down payment, your property may not have sufficient equity for a refinance.
The same can apply if you already have a second mortgage utilizing home equity.
Lenders typically want to see a minimum of three percent in property equity before a refinance is approved. Equity will measure the value of the home that has already been paid off.
In other words, it is your property’s value minus the mortgage balance right now.
- The borrower’s credit score
The person refinancing the property loan needs to have a credit score that is high enough to qualify.
If your credit score has gotten worse since you took out the mortgage, there is a chance you may not qualify for a refinance anymore. You will need to rebuild your credit score.
However, this is not something that happens overnight. Depending on the current state of your credit report, it could take weeks, months, or even years.
- The borrower’s income
Finally, the income of the person refinancing is taken into account.
It is harder to qualify for a mortgage as an individual than it is as a married couple because single borrowers tend to earn less than a couple.
The lender will verify the income of the single borrower during the underwriting process. This will be compared to her or his monthly debts, including vehicle payments and minimum credit card payments.
If the single borrower has sufficient income to support the new home loan, then refinancing could be a viable option.
How to buy out your spouse’s share of the home equity after divorce
In many states, the court will split the accumulated equity in the home between the two people getting divorced.
However, unless you already have sufficient money to purchase your spouse’s share, you will need to access the property’s equity first so you can buy out your ex-wife or husband.
Most people will get a home equity loan in this situation. With this, you do not need to refinance the initial home loan. So, if you managed to secure a great interest rate when you bought the property, you will be able to hold onto it.
You would continue to make the existing mortgage payments. You will then have a second monthly payment for the home equity loan.
Closing costs are low. Plus, these loans are easier and faster to get in comparison with primary mortgages.
How to keep the property and the mortgage after divorce
If you do not want to sell or refinance your marital property, you could decide to keep the mortgage and home as it is.
Both you and your ex-spouse would remain on the loan and be liable for the monthly payments.
When taking this approach, there needs to be very clear and specific language in the divorce agreement about who will pay the mortgage every month.
Perhaps you and your children will remain in the property, yet your ex-partner will be making the mortgage repayments? Whatever the situation is, it needs to be clear in the divorce agreement.
There are a few things that you do need to keep in mind if you decide to go down this route:
- Both partners will be jointly liable
If your name is on the loan, the mortgage lender deems joint mortgage responsibility for the monthly payments, irrespective of the agreement you have come up with.
Even if your divorce attorney has negotiated your ex-partner’s responsibility in your divorce settlement agreement, your mortgage lender is not going to simply overlook missed payments.
- The risk of a missed mortgage payment
If your former partner decides not to abide by the divorce decree anymore or is unable to do so, this could result in missed mortgage payments.
If both of your names are on the mortgage agreement and your partner fails to pay, it will also impact your credit score. In the worst-case scenario, you could end up losing the property and its value to foreclosure.
- Risk to future home loan eligibility
Last but not least, don’t overlook that leaving your ex-partner’s name on the mortgage may influence their ability to purchase a new home in the future.
The borrower’s debt-to-income ratio (DTI) is critical when qualifying for a mortgage. When a potential home buyer is listed on another mortgage, this will appear in their DTI, which could impact their new application for a loan.
Important: While your divorce may be amicable now if you have a mortgage loan that lasts for another 15-20 years, can you really count on the fact that it will be the same down the line?
How to sell your property after a divorce
Of course, the final option is to sell the property.
If you cannot afford to buy out your partner, or vice-versa, or neither of you is interested in staying in the family property, selling the house and splitting the proceeds makes sense.
When deciding whether or not to go down this route, make sure you factor in all of the costs associated with refinancing or selling. Some examples of these costs are:
- Capital gains tax
- Real property transfer taxes
- The expense of sprucing up the home to make it more attractive to buyers
- Realtor commission
How to get a new mortgage after a divorce
Divorce can impact your income, credit, equity, and marital assets — any of which can determine whether or not a client can get the financing he or she may need to stay in the home or buy a new one.
Whether you own a home with your ex-spouse or you’re hoping to buy one for your newly single life, real estate (and the mortgages that typically come with it) can muddle things, making it hard to know your best path forward.
Here are answers to some of the most commonly asked questions to help guide you to the path (and joy) of new home ownership:
- Can I use child support or alimony as income when qualifying for a mortgage?
Technically, you can use child support, spousal support, or alimony as income when qualifying for a mortgage loan.
The caveat here is that most lenders want you to have at least a six-month history of receiving these payments before they count them as income. It may be less if you have a VA loan, so be sure to ask your lender.
In some cases, you may be allowed to move forward with a loan sooner than this — but only if you have a court order stating you’re due alimony or support for at least three years into the future. This depends on the lender and loan program you’re using, though.
- Can I still get a mortgage if my credit score is affected by shared accounts and loans?
It can be frustrating if all your credit is tied to your spouse’s.
If you remove your name from their accounts, you’ll lose all that credit history and payment history — and those account for a large portion of your credit score.
Unfortunately, there’s not much you can do to combat it.
In an ideal world, you’d split up your accounts evenly so both of you come away with a few solid accounts to your name.
If this isn’t possible, you’ll have to start building your credit up from square one. This means opening a credit card, making small purchases, and paying it off monthly. If you rent a property, you can also ask your landlord to report your rent payments to credit bureaus. This can help you establish your credit as well.
- If my divorce decree says my ex is responsible for our mortgage, will a lender still count it on my application?
If your name is still on the mortgage, then your lender will still consider it when evaluating your application.
It will count toward your debt-to-income ratio (DTI) and determine how much you qualify for and your interest rate.
Your best bet in this scenario would be to have your ex refinance the mortgage solely in their name. This would remove the loan from your credit report and improve your chances of getting a loan. (Paying off that mortgage might even help your credit score a bit too.)
Factor in the tax implications when making your decision
If you buy out your ex-partner’s share or you sell your property as part of your divorce agreement, capital gains tax may come into play.
This is a tax on the sale of a property or any other type of capital asset when the profit is more than a specific amount. If you sell the property, you and your partner can each minus up to $250,000 of gain from your taxable income.
However, this is only applicable if the house is your primary residence and you have lived in it for at least two of the past five years before selling it. Investment or vacation properties do not count.
Capital gains tax is a progressive tax, very much like ordinary income taxes. If you and your ex-partner are wealthy, you may find that you end up paying as much as 20 percent in capital gains tax when selling your home.
Seek quality advice if you are divorcing & own a property
We hope that this guide gives people potentially facing a divorce or separation a better understanding of what happens if the couple owns a house and it needs to be split among the couple.
Divorcing while owning or trying to buy a home can be challenging, so be sure to consult the right professionals. Get in touch with a mortgage office at Embrace Home Loans, hire an experienced family law or divorce attorney, and consult a tax professional, too.
Buying a house after divorce or selling a property will impact the deductions you’re eligible for on your annual tax returns.
Additional Divorce & Mortgage Questions
Do I still have to pay my mortgage after the divorce?
Divorcing your spouse does not excuse you from paying your mortgage — even if they’re the only one living in the house.
As long as your name is on the loan, you’ll need to ensure the mortgage is paid on time, every time, or else you risk serious credit damage.
Not paying could also lead to foreclosure and problems securing other forms of credit in the future.
What happens if my ex doesn’t pay the mortgage?
If your name is on the mortgage and your spouse (or you) doesn’t pay up, you can expect a few things.
First, your payments will be reported as late on your credit report. This will hurt your credit score, and you’ll also begin to rack up extra interest on that unpaid balance.
Finally, your lender will foreclose on the property — delivering yet another blow to your credit and future financial prospects.
What happens if a house goes into foreclosure during a divorce?
If your home is foreclosed on, your lender will take possession of the property, sell it, and force you — or whichever spouse is living in the home — to leave.
You’ll be entitled to no portion of the profits, and the foreclosure will remain on your credit report for at least seven years.