What happens to your mortgage during a divorce
Decisions regarding the marital residence and your mortgage are a significant part of a divorce. How you choose to deal with your mortgage during a divorce can be a critical financial choice for your future. Consider a couple, Steve and Jane, who have decided to divorce. Like many couples, they purchased their house together and carry a large balance on their mortgage. They want to keep the family home for the kids but aren’t sure how to separate the obligation for the mortgage. They’re unsure that either of them can make the payments on their own.
Keeping the marital home “for the sake of the children” if that means foregoing other assets like retirement, or stretching your budget too far is never a good solution. Children are far more resilient than we give them credit for. Working with a Child Specialist as part of your divorce team can help parents to fully understand what is important to the children.
Decisions during divorce often carry a great deal of emotion with them; however, it’s important to remain objective to make the right choices for your future. Dealing with your mortgage during a divorce may be one of the most significant financial decisions you’ll make. The key consideration is whether the spouse who wants to retain ownership of the residence can afford to do so. If there is equity in the house (market value less the mortgage balance), how is the spouse who is leaving going to receive their share of the equity? Working with a financial neutral during your collaborative divorce process can help you sort through the options to find a mutually agreeable outcome.
Refinance Your Mortgage
One option is to refinance your mortgage. In this case, the person keeping the house will need to qualify for the loan on their own, and the other will then be removed from the obligation. Does the spouse needing to refinance have sufficient income to qualify for the new mortgage? If they are counting on receipt of child support and possibly alimony to qualify, under what terms will such income be considered by the lender? Sometimes the amount of the mortgage may need to be increased in order for the leaving spouse to receive their share of the equity in the home. Will the spouse retaining the home be able to afford the increased mortgage payment?
Your group of collaborative divorce professionals can help you explore options. For example, one spouse could make a cash buyout of the equity or offset it against other marital assets.
Different mortgage programs can help you refinance a mortgage during a divorce. It is important to work with a mortgage professional who is experienced in mortgages as part of a divorce.
Sell Your Home
In some cases, the spouses may agree to sell their home. If you have substantial equity, this can provide both of you with some funds to start over. It may allow you to select a new home that will better suit your new life
Maintain the Status Quo
You may choose to deal with your mortgage during a divorce by staying with your existing loan, even though only one of you resides in the house. This means both of you are “on the hook” for the obligation. This prevents you from having to refinance and may work if you divorce amicably. This option requires trust. The bank expects the payments whether your spouse follows through or not, so this is generally a short-term fix rather than a long-term solution. If the spouse doesn’t make the mortgage payments on time, your credit can be ruined.
It can be challenging to make changes, but you will need to consider your options. If you need help dealing with a mortgage during a divorce, contact the professionals at Best Legal Choices to get started.
Are you facing a divorce, and wondering how the house will be handled? Click here for more information on real estate and divorce.
Mr. Juilfs is the founder and managing member of Fair Share Divorce. He began his career in the Financial Planning industry as a Financial Advisor with American Express Financial Advisors in 1997.