What to Do About Your Mortgage When You’re Getting Divorced
Divorce is never easy. Even for those couples with the best intentions, the division of property can become contentious. For couples who have a mortgage and are trying to decide what to do about the house, here are some options to consider.
Sell the Marital Home
If neither you or your spouse can afford to refinance your existing mortgage — or you’re unable to reach an agreement on who should stay — selling the home and dividing the proceeds is one option.
Selling (usually) pays off your mortgage, leaving you both free to walk away. If you reside in Arizona, California, Idaho, Louisiana, Nevada, New Mexico, Texas, Washington, or Wisconsin, these states are considered community property states. That means that all property must be divided equally. The remaining so-called equitable states require property to be distributed fairly between both parties, though not always equally.
Refinance Your Mortgage in a Divorce
If the two of you are able to reach an agreement on who will keep the house and can afford to make mortgage payments, you can buy your partner’s half and refinance the balance in your own name. You can do this provided you’ve accumulated enough equity in the property.
For example, pretend your home is worth $350,000 and you still owe $100,000 on your loan. The difference between what your home is worth and what you still owe — $250,000 — is the amount of equity that you have to split between the two of you. You can then refinance the house at $200,000 in your name and take cash out to pay your spouse the $125,000 you owe them. You may even be able to lower the cost of your monthly payments depending on current interest rates.
Be sure you both check with your attorney, accountant, or tax advisor regarding capital gains as well as the implications of the Tax Cuts and Jobs Act. This new law, which applies to all divorces finalized after December 31, 2018, states that the spouse who earns the higher income and pays alimony will no longer be able to deduct their alimony payments. Conversely, the spouse awarded alimony no longer has to pay taxes on the alimony they receive.
Qualifying to Refinance as a Single Person
Of course, refinancing requires that you go through a credit check in order to qualify for the loan as a single person. If you’re concerned that you may be unable to secure a loan on your own, see if a sibling, parent, or adult child would be willing to co-sign as a non-occupant co-borrower. If you’ll be receiving alimony, it counts as income and can be used to help you qualify for the loan. Be sure the divorce decree stipulates that you’ll be receiving alimony for a minimum of three years.
Important note: Before you transfer the mortgage to your name be sure your ex is willing to transfer the title to you as well. The title is your proof of ownership. Failure to remove your spouse’s name will mean they will still own the home — even if they’re not making mortgage payments. Your attorney can help with safeguards for this, which would be detailed in the decree.
The Bottom Line
Going through a divorce is always difficult. Fighting over who gets the house or whether to sell can be particularly challenging, causing additional emotional strain. It’s good to know there are ways to equitably resolve the issue should you and your partner decide to call it quits. Contact your local Embrace loan officer to learn more about how we can help.