There are certain “hot button” issues in divorce that can have a significant impact on your life after divorce.
The common list of hot button issues includes things like child custody, spousal and child support, and the division of assets.
The division of assets extends far beyond your bank accounts, retirement plans, business interests, and personal property.
What other BIG assets might fall under this category?
You guessed it … the family home!
The process for splitting up the home can be both complicated, and (not surprisingly) contentious too.
This guide is aimed at helping you make sense of it all.
We’ll walk you through your options, the process, and everything in between that you should know to help you make an informed decision on the all-important question:
What happens to the house in divorce?
Let’s jump in.
- Options for your home and mortgage in a divorce
- How do you determine your share of the equity
- How to split your house when there’s a mortgage
- What steps should you take to sell your house during divorce
- Options for determining the value your house in a divorce
- What to do when you can’t “divorce” the mortgage
- How to refinance your mortgage
- Reasons to refinance
- Assuming your mortgage
- Refinancing costs
- Real estate deeds used in divorce
- Getting help from professionals
Options for Your Home and Mortgage in a Divorce
There are several choices for settling the home and mortgage in your divorce settlement.
Preparing for these options in advance will give you the best chance for a successful, amicable outcome.
Here are some primary options that you might consider:
Option 1 – One spouse keeps the house, and buys out their spouses share of the equity
For a variety of financial or emotional reasons, one spouse or the other may decide they want to keep the home.
The best way to do this is for the occupying spouse to refinance the home in their name only and with just their income.
The question then becomes, does this spouse qualify? If so, how much does this spouse qualify for? More on this later.
What if they want the family home but I don’t?
If you are the spouse giving up rights to the home, it is imperative that your name not only be removed from the title, but from the mortgage as well.
Don’t overlook this important distinction when weighing your housing options. Most people mistakenly see title to the house and the mortgage as one in the same.
They are not.
While the primary question at your settlement discussions may revolve around what to do with the marital home, the underlying question to ask is what can and can’t be done with the marital mortgage.
Start there, and work backwards.
Until this happens, you and your spouse are both liable for the full mortgage payment each month.
Imagine a scenario in which your ex misses a payment, loses their job, becomes disabled or dies. Do you think you’ll still be on the hook for the mortgage payment even though you are no longer on title to the property?
And if you don’t make the payment yourself and allow the debt to grow in delinquency, your credit is going to be severely damaged as a result.
Credit blemishes can take years to repair. Poor credit can impact your ability to get a loan in the future for things such as houses, cars, business loans, etc.
Another consequence of leaving the mortgage unaddressed is that the mortgage debt (even if you are no longer required to make payments) can prohibit you from being able to qualify to buy another home after the divorce.
For example, imagine the house is awarded to your spouse in the divorce. The mortgage was left untouched, in other words, both of your names remain linked to it. However, you feel protected because the settlement agreement assigns all debts associated with that property (including the mortgage) to your ex-spouse who is presumably still residing in the home
It’s now your turn to go out and buy a home so you can begin to establish your own new life. You apply with a bank lender and the lender tells you that you don’t qualify because your debt is too high in proportion to your income.
How can that be?
Remember that mortgage that you left untouched after the divorce?
Well not all lenders will honor your legal assignment of debt. This means they may still want you to qualify using debts on BOTH properties simply because the old loan shows up on your credit report.
Some lenders will honor the legal assignment of mortgage debt, and that’s a positive. However, it’s not something you’ll want to leave to chance.
Being aware not just of the options available, but also the pros and cons and each strategy are an important piece of the puzzle.
The earlier you can assess these questions, the better your chances of resolving them in a quick and efficient manner.
Option 2 – Retain co-ownership of the home, set a deferred sale date
As you might guess, this is not an especially popular option especially given the advice provided earlier.
This option doesn’t necessarily mean that the two of you are going to continue to live in the house together. Although, some couples do manage to find a way to peacefully co-exist under one roof while going through a divorce.
The choice to co-own the house for a specific period of time following the divorce could be for a number of valid reasons:
- Kids are going off college in X number of years
- Impact of capital gains and other taxes related to a sale
- The retaining spouse is unable to qualify for a loan in their own name
- The housing market is at a peak, and you are waiting for it to cool off before moving elsewhere
- Or simply because the property is just too valuable of an investment to let it go.
A residual benefit to this strategy is that you can both share in the appreciation of property value during this period of time.
Also, to the extent that you both continue to share in the property expenses (mortgage, property tax, homeowners insurance, etc), this could be a cheaper option and a way to improve your individual cash flow as opposed to carrying the load all by yourself.
Did you know in a co-ownership scenario, you could also choose to rent the home?
If you’re delaying the sale of your home, this is another legitimate option.
The obvious benefits of having additional income in the short term should come as a welcome relief.
Renting the home to others does come with its own special set of challenges and if you do decide to go this route, it might be wise to engage the services of a property management firm to avoid the possibility of conflicts between you and your spouse.
You might be thinking of this rental income strategy as a way to generate additional income to show on your mortgage loan application. Lenders only allow this in a limited number of circumstances.
Simply put, lenders will not include rental income on a property that you are claiming to be your “primary residence”.
The only exception to this rule is if the rental income is generated from a detached accessory unit, such as a cottage. A bedroom in the same house you live in doesn’t count.
The rise of Airbnb and short-term rentals has added another layer of complexity to lending guidelines, so be sure to run your specific scenario by a qualified divorce mortgage advisor.
An alternative strategy when co-owning after divorce is to request a deferred distribution.
A deferred distribution is when the court agrees to divide up the equity in your house at a later date.
This option still provides stability for any children in the home, with orders not to sell the home until the youngest child turns 18 or goes off to college. At that point, the home must be sold.
The division of equity would then be based on the new value of the property at that point in time, and not based on any fixed value from a prior date.
This is a common approach when housing markets are soft and couples want to have the opportunity for increased profits from the sale of their home at a later date. By selling the property now at an unattractive price, there could be a large amount of gains from a future sale that are left on the table.
Similar to a deferred sale, with deferred distribution the court usually requires both spouses to share in expenses that will include mortgage payments, taxes, home owner’s insurance and maintenance costs.
Option 3 – Sell your home.
The final option – selling your home.
This might be a last resort for most. For others, it might be the only option.
One thing is for certain in a sale – both spouses will ultimately receive the share of the (equity) proceeds that they are entitled to.
These funds can be put to good use afterwards, and can help either or both spouses successful land on their feet following the divorce.
As with all decisions surrounding the home and mortgage, selling your house can have a large financial impact with items including capital gains taxes, exclusions, mortgage prepayment penalties, etc.
There are other downsides to selling your house, especially if you don’t want to:
For one, there may be deep and emotional ties to the home, especially if you have been in it for several years and have raised a family under that roof.
These emotional impulses can lead to knee jerk reactions, and poor decisions about what the “best” option truly is.
Be sure that you are selling your house for the right reason, and not just to please your spouse or even worse, force a sale out of resentment.
What if our mortgage exceeds our home’s value?
Another unique challenge to selling the house in divorce has to do with the current mortgage balance in proportion to the current property value.
Have you ever heard of the term “underwater”?
This is when the current mortgage balance exceeds the current property value. In this case, a short-sale might be the only option.
A short sale is when the property is sold for less than the current balance of the outstanding debt. This leaves the lender or creditor with a loss due to the fact that they can’t recoup the entire amount of the loan balance.
You’ll want all of the lien holders or creditors to agree to accept to less than the total amount owed, otherwise you could be left with an outstanding balance that you could be required to repay even after the sale of the home.
In difficult times, some homeowners in divorce may need to resort to other means for disposing of the house.
Resolving these challenges gets a bit trickier when neither client is in a financial position to afford to keep the property AND there is little or no equity remaining in the property at the time of the divorce settlement.
In these cases, you may need to resort to things such as a loan modification. Or, to take it a step further the alternatives could also be: foreclosure, deed-in-lieu of foreclosure, bankruptcy.
While we won’t touch on topics such as foreclosure and bankruptcy in this post, it’s important to know all of the tools available to you in settling your real estate issues.
At the end of the day, it’s imperative that you retain professional help to sort these options – the pros and the cons – the dos and the don’ts.
If you don’t trust your spouse, and you don’t have enough information to make the right decision for one of the biggest decisions of your life, then you need to consult with trained professionals.
Whether this is a family law attorney, Certified Divorce Financial Analyst, CPA, or divorce mortgage specialist, you need to determine all the possibilities available to you, and ONLY THEN can you make a good decision.
We have a popular saying that goes, “First determine what’s POSSIBLE, then determine what’s PRUDENT.”
Under no circumstances should you finalize your divorce until your home and mortgage considerations have been addressed, analyzed, and carefully planned for.
How to determine your share of the home equity
Property division in divorce rests on several factors.
First, you need to find out whether you live in a community property state or equitable distribution state.
Then, you need to understand the difference between separate property vs. community property (or marital property).
Some states are considered community property states which means that all assets acquired during marriage are divided equally. This holds true for your house, as well as rental properties, investment accounts, pension plans, business interests and so forth.
However, this does not always mean you will get 50% of a home’s value when you divorce.
It may be possible to trade off the value of the home in exchange for greater or lesser interests in other community assets, with the net effect still being a 50-50 split.
Again, the amount of money you stand to receive as part of the division of assets will depend on the State you reside in, and the classification of marriage assets (i.e. are they classified as “community property”).
Separate property generally refers to assets acquired before marriage or after separation. It also includes assets acquired during marriage by gift or inheritance.
For example, if you own and home and you then get married, the house would be considered separate property, at least initially. But if both spouses begin contributing to the house either through mortgage payments, or if the house is re-titled to include the other spouse, then it converts to community property and will be split as such in the event of a divorce.
The timing of when something converts to community property from separate property is usually a hot button for clients in divorce, and homeowners in particular.
Separate property can also be an inheritance received by a either husband or wife during a marriage or any gift given to either during the course of a marriage, including real estate.
To prevent separate property from becoming community property, a spouse should take steps to keep the asset separate through individual bank accounts and other measures.
For example, if you own a house prior to divorce and you intend to keep this as separate property throughout the marriage – do not add your spouse to title. In CA, the property becomes community property at that point in time.
Settlements in equitable distribution states do not require a 50-50 split, but courts require that a split should be both fair and equitable.
Several factors are taken into account in equitable distribution states, including:
- The financial situation of each spouse
- The length of marriage
- The age and physical/emotional state of each spouse
- The income and earning potential for each
- The needs of the custodial parent to maintain any children’s lifestyles
And the list goes on.
What if the home is in the name of one spouse only?
Again, it first must be determined if your home is community property or separate property.
If you acquired the home before marriage and kept the financial aspects of the home separate, you can strengthen your case for separate property, but your spouse may be able to make the case that they contributed to paying for the home and thus are entitled to the equity as well.
This case is strengthened in a long-term marriage. However, if the house can be proven to be separate property (much easier to prove in a gifted or inherited property) then the spouse owner will retain the home.
In cases where there is a dispute, a spouse can block the sale or transfer of the house until a judge decides how to divide the property.
A spouse can also file a lis pendens.
A lis pendens is a notice (much like a red flag of sorts) that warns the public of a lien that has been placed on the home. It is recorded in the register of deeds in the county clerks office where the home is located.
This lis pendens (or red flag) is not removed until after an appropriate legal ruling, such as a final divorce decree. Lis pendens laws vary by state so it is best to check what applies in your particular jurisdiction.
What if the home is in the name of both spouses?
If the home is in both names, then in a community property state, both spouses will share equally in the division of the home as an asset.
There may be some give and take regarding what portion each spouse is entitled to when including the division of other assets, but in general, a 50-50 split is the rule.
Again, your family law attorney or other qualified divorce professional should be able to walk you through the division of assets and the expectations for what you are entitled to, in addition to what the court may be inclined to order.
In equitable distribution states, courts will attempt to determine what is fair & equitable for dividing up the home, but other factors including each spouse’s earning potential, the length of the marriage, physical and emotional considerations, the needs of the custodial parent and other similar factors will have an impact on how the home is apportioned.
How to split the property when a mortgage is involved
If your house has a mortgage, that can present some additional challenges.
Here are some common questions that come up regarding the mortgage in divorce:
Can I Remove my ex’s name from the home and mortgage?
First, you need to understand that removing a spouse from the home (aka title transfer) and removing them from the mortgage (aka refinance) are two completely separate tasks.
Many look at title and mortgage as being one in the same.
They are not.
Can I remove my ex’s name from title?
Yes. In fact, in instances where one spouse has agreed to take over the house as part of the divorce settlement, it may be wise to have the former spouse’s name removed as quickly as possible so that they legally won’t get any of the proceeds if you sell the property or inherit it if you pass away.
From the former or departing spouse’s perspective, they are inclined to have their name removed from the existing mortgage too.
Removing one party from title does not remove them from the current mortgage lien, assuming the loan is in both of your names.
The title transfer is accomplished through a simple grant deed or interspousal deed. The same cannot be said for the mortgage, which requires one spouse to qualify to inherit the mortgage debt on their own.
Does the departing spouse, or out-spouse, want to be associated with the ex-spouses mortgage for presumably the next 30 years (or remaining term on the mortgage)?
The answer may be yes or no depending on your tolerance for risk.
What are the risks of not removing the departing spouse (out-spouse) from the mortgage?
There are a couple different ways to look at this. The two primary considerations for the out-spouse are:
- Will it damage my credit if my ex-spouse misses a mortgage payment?
- If I want to buy a new home, will the old debt prevent me from qualifying?
The first question is a credit issue, while the second question is a loan qualifying issue.
The divorce settlement agreement might state that the retaining spouse (the in-spouse) is responsible for all mortgage and housing expenses.
The agreement might also state that the out-spouse is indemnified and held harmless of any and all responsibility for those housing obligations.
To hold harmless is defined as: “To absolve another party from any responsibility for damage or other liability arising from the transaction.”
To indemnify is defined as: “To reimburse another party for a loss suffered because of a third party’s or one’s own act or default.”
Given this information, let’s look back at the two primary considerations again:
Will it damage my credit if my ex-spouse misses a mortgage payment?
The short answer: Yes.
Unfortunately, the credit bureaus do not care which party the property was assigned to. The only thing the creditor cares about is getting repaid.
If you are co-signed on a mortgage with your ex-spouse, from the creditors point of view you have agreed to keep up timely payments.
In the event that a payment is missed, this will be reported directly to the 3 credit bureaus. The 3 credit bureaus are Experian, Transunion, and Equifax.
These companies are responsible for reporting your credit history and generating an applicable FICO score (aka credit score). Upon notice of a delinquent mortgage payment, this delinquency is immediately reported on BOTH of your credit reports.
Therefore, neither party is granted any immunity from the original promissory note that they signed together.
If I want to buy a new home, will the additional debt prevent me from qualifying?
The answer to this question can vary from lender to lender.
In most circumstances, a lender looking at a mortgage application is usually able to exclude debt on a former residence provided the settlement agreement reflects such.
Lenders consider this is legal assignment of debt, and will not penalize the departing spouse for the additional debt.
It’s worth mentioning that lending rules are constantly evolving. Lenders are consistently revising their guidelines based on market trends and other risk factors.
In today’s lending world, this legal assignment of debt is often sufficient.
We don’t know, however, if and when those rules will ever change.
For this reason, it’s always best to weigh the risks involved before agreeing to retain a joint mortgage following the divorce settlement.
What is the process for removing one spouse’s name from the mortgage?
To remove a spouse’s name from a mortgage, you will have to apply for a refinance home loan solely in your name. The refinance process involves an initial application, lender underwriting and approval of your income and credit, along with an appraisal.
This not only protects you by demonstrating you have sole ownership in the home, it also protects your ex who would other still responsible for mortgage payments in the event you do not keep up with payments.
What about the title to the property?
Once you have been approved for a refinance loan, you will also need to have your ex-spouse’s name taken off the deed to the property as well.
This is typically done through a quitclaim deed or an interspousal transfer deed, meaning that your spouse gives up his or her rights to the property. This deed is then filed with the county clerk’s office and title to the property becomes update.
Sometimes it makes sense to refinance this loan pre-divorce, prior to the judgement or dissolution going into effect. Often times the refinance is done prior to any settlement agreement being put together.
If you are updating title to the home in a pre-divorce refinance while still legally married, you will need to hold title as:
A Married Man/Woman, As His/Her Sole And Separate Property.
Then, once the divorce is finalized you can file another deed changing title from your sole and separate property to:
An Unmarried Man/Woman.
These are just a few of the important process and timing considerations associated with the division of property.
Should I allow my spouse to have exclusive use of the home if I am still on title?
If you agree in a divorce settlement to give your spouse the home, ideally, they’ll refinance the home mortgage in their name only. This will provide reassurance that you no longer have any financial responsibility, and will then be able to confidently sign over title to the home.
The exception to this is if there is a deferred distribution whereby both parties agree to maintain possession of the house until such time that a court orders the house sold, usually when there are no longer minor children living in the home.
What Steps Should I Take to Sell the Home in a Divorce
To make a clean break during a divorce, many spouses agree to sell a home and divide the proceeds as part of the starting over process.
Keep in mind that this only works when ownership in the house is not being disputed as part of a contested divorce settlement. In those cases, a judge will make a final ruling to decide how much equity (or money) each spouse is entitled to once the property were to sell.
During this negotiation period, both sides will be blocked from selling the home until a final decree has been issued.
When one party files a Petition for Dissolution of a marriage, they are restricted from doing anything with the property.
The Summons, which lists assets and real property, are also temporary restraining orders, or TRO’s, that prohibit either spouse from disposing of or concealing any property.
There are some exceptions to these types of orders. For example, if the property is going into foreclosure or has already entered the foreclosure process, the judge will not be able to prevent the bank from taking over the home upon completion of that foreclosure process.
Another exception is when the home is the only source of liquidity that would enable the party or parties to pay their attorney fees and costs. If there is no way to cover these specific expenses over the course of the settlement, the order to sell the home by the judge could come sooner than expected despite any TRO’s in place.
In the absence of these restrictions, and especially when there is an agreement about selling the home before the Petition is filed or after the final decree, the spouses will go through a fairly traditional sales process.
First, find an agent that you can both agree on using. If you can’t decide, a realtor will then be assigned to you. The agent will help set realistic expectations for the potential sales price, market your property, and advise on which offers as the most attractive.
More importantly, your realtor should be open and honest about the communication process during this listing. How will both parties be informed of any activity taking place? Ultimately, both parties should have an equal voice in deciding which offer is best.
There are real estate agents that specialize in divorce transactions. They are specifically trained to not just deal with the legal and financial aspects of the sale as it pertains to your divorce settlement, but also the emotional aspects which include effective communication, joint decision making, and transparency.
How to Value the Home in Divorce
We’ve already identified the home as likely being the most valuable asset to be split during your divorce.
The current value of the home is the primary factor in determining what your financial position will become post-divorce.
Agreeing on a property value is not always black and white. Property values and market trends across the country can be volatile on a daily, weekly, or monthly basis.
Here are some of the most common ways for valuing the home:
- Formal appraisal by a licensed real estate appraiser
- Comparative Market Analysis (CMA)
- Broker price opinion (BPO)
- Online Price Estimator (Zillow, Redfin, etc)
- Property Tax Assessment (County)
These options are listed in order of priority.
The most accurate and preferred method of valuation is a formal appraisal completed by a licensed real estate appraiser. The appraiser will go to your property to complete an inspection, review market trends, consider recent comparable sales, and then prepare a full report usually anywhere from 15 – 40 pages in detail.
A second and third option is either a Comparative Market Analysis (CMA) or a Broker Price Opinion (BPO). The CMA is usually completed by a real estate broker. The report will address local comparable sales and make price adjustments (positive or negative) for any difference in the features of the recent sales as compared to your property.
The broker price opinion is often completed by a real estate broker as well, but doesn’t necessarily consider real-time market activity.
The third and fourth options should not be used in determining a true property value.
A property tax assessment is a value that the County assigns your home in an effort to calculate your property taxes. However, these re-assessments happen infrequently if at all. In other words, the County places a value on your property but rarely updates the assessed value despite home improvements and property appreciation over time.
For this reason, your assessed value is not a true indicator of today’s value.
The same applies for online price estimators such as Zillow and Redfin.
These online platforms do a great job at estimating your current property valued based on a ton of curated, local data. However, it is what it says it is, which is an estimate. These companies aren’t driving by your property, inspecting the inside, or taking condition into consideration at all.
While the accuracy of these estimators has improved over time, they should not be relied on in deciding the true value of your home today.
When divorcing the mortgage is NOT an option
Not all divorcees will be positioned to qualify to take over responsibility for the entire mortgage on their own.
This problem is worsened when the spouse retaining ownership needs to pull cash from the property (via refinance) in order to complete their buyout or equalizing payment.
In certain scenarios, the departing spouse or the out-spouse will agree to keep their name on the mortgage while giving the in-spouse exclusive rights and ownership of the home.
While this may be the path of least resistance, it presents several unique questions:
Who is Responsible for the Mortgage Payments? Am I Responsible for Half the Mortgage if my Ex Stays in the Home?
As we discussed earlier, this question is two-fold. There is a difference between responsibility from a credit perspective, and responsibility from a legal perspective.
As long as your name is listed on the mortgage documents as one of the owners of the home, then you and anyone else listed as a borrower are financially responsible for the mortgage payments as far as the creditor and the credit bureaus are concerned.
It does not matter if only one of you continues to live in the home or not. And even if you work out an agreement for one spouse to pay, if either of you misses a payment and your name is on the mortgage, the delinquencies will affect both of your credit profiles.
A joint mortgage means you share joint responsibility until the home is sold or your name is removed through refinancing.
However, your Marital Settlement Agreement can state that the retaining spouse bears sole legal responsibility for maintaining payments on the home. Most lenders consider this to be a legally binding assignment of debt.
Emphasis on the word most, as not all lenders have the same guidelines and criteria for excluding this sort of debt. Check with a divorce mortgage advisor for specifics unique to your situation.
To the extent that this clause is part of your agreement, you may have recourse in the event the in-spouse fails to hold up their end of the bargain, at least in the court’s eyes.
However, the credit bureaus will still penalize you for any delinquent payments regardless of who is at fault.
What Happens if my Ex Does Not Remove my Name From the Mortgage?
If your home is awarded to your spouse in a settlement, then part of this will include taking appropriate steps to remove you from the title AND the mortgage.
If a spouse does not follow the divorce decree, which has the same standing as any other court order, then you can petition the court to enforce your settlement or an equitable distribution order.
Although the process will take some time, ultimately your name will be removed from the title and the mortgage whether it’s via refinance or sale of the property.
Courts usually grant some reasonable and pre-defined amount of time for this to happen and the actual amount of time may vary due to how long it takes to refinance the home or if added time is needed to build credit worthiness or find a co-signor.
If a spouse does not meet the deadline determined by the court, then you could file a motion for contempt. And if your spouse has attempted to refinance the home but failed, then the court could order that the home be put up for sale.
Can I Personally Sell the Home if my Ex’s Name is on the Mortgage?
Unless a divorce decree gives full ownership rights to one spouse or the other, jointly owned homes will also require the approval and signatures of both spouses.
If one spouse refuses to cooperate with the sale of a home, legal action may be necessary. A spouse may petition the court to amend a divorce decree and order the sale of the home that both spouses own. This can be time consuming and expensive if spouses are quarreling about whether or not the home should be sold.
How to refinance your mortgage in a divorce
So you’ve decided which one of you is going to keep the house following the divorce.
The retaining spouse now has a task to complete – refinancing the home mortgage into their own name.
This requires the bank to review the borrowers financials, and determine whether they are a qualified candidate.
The application process for a divorce mortgage is no different than that of any other standard mortgage application process.
They all come back to the same subject: Qualifying.
Whether the refinance is to simply remove one spouses name by refinancing the existing mortgage balance, or if the refinance requires you to pull cash-out from the home for buyout purposes, the qualifying parameters remain largely the same.
Qualifying for a mortgage in today’s lending environment rests on three primary pillars, or as we like to call them – The 3 C’s:
#1 Capacity: (aka income, or your ability to repay)
#2 Credit: (your historical ability to manage debt and make timely payments)
#3 Collateral: (the amount of equity, or ownership, you have in the home)
All three of these boxes need to be checked in order for someone to successfully obtain financing, at least by conventional lending standards.
Here’s a sneak peak into the significance of each of the 3 C’S:
Capacity (aka income): Lenders abide by strict debt-to-income ratio (DTI) limits. In other words, a lender will review your financials to determine whether your monthly debts exceed a specific percentage of your gross monthly income.
For the most part, these debt-to-income (DTI) ratio limits are non-negotiable. If your ratio exceeds what they allow, you’ll be unable to complete the process. A couple tips for alleviating debt-to-income ratio challenges are:
- Lower the mortgage amount
- Pay off other debt
- Find additional sources of income
Credit (aka FICO score): Lenders put heavy emphasis on your credit history, specifically your credit score or FICO score. A low FICO score signals to the bank that the borrower may not be good about paying their bills on time.
Or, the credit report might show that the borrower carries an excessive balance in proportion to their credit limit. A high score signals just the opposite.
A low score yields a higher interest rate, as they level of perceived risk is heightened. Borrowers with higher credit scores receive the benefit of cheaper mortgage rates and/or costs.
Collateral (aka the home): The 3rd and final piece to the puzzle is the home itself. Lenders will only extend loans up to a certain percentage of the home’s value. They call this a loan-to-value limit (LTV).
This is where a formal appraisal comes into play. The amount of equity one has in their property must be documented through this appraisal process, in order to generate a loan-to-value ratio (LTV).
In the event the loan amount exceeds the lenders limits in proportion to the home’s value, a client may be unable to qualify for a refinance.
An alternative for alleviating LTV restrictions could be reducing the mortgage balance, finding additional comparable sales to support a higher value, or accepting a higher interest rate as a result of the excessive ratio.
These are the three primary factors that will play into your ability to qualify for a new mortgage.
The early you can prepare for this in your divorce settlement – the better.
Once the divorce is final and you’ve put ink to paper, it’s extremely difficult to go back and amend things after the fact.
A divorce mortgage advisor should be able to think ahead to what your financial picture will look like post-divorce, and advise you what you need to do (if anything) to position yourself in the best light possible when it comes time for the bank to take a good look at you.
For a look at some of the unique lending rules specific to divorce applicants, feel free to download a free copy of Divorce Your Mortgage: The Definitive Guide.
This guide will provide a high-level overview on what separates a standard mortgage application from the divorce mortgage application that you’ll be submitting.
Reasons to refinance your mortgage in a divorce
We’ve boiled it down to two primary reasons why someone might be required to refinance the mortgage after or during a divorce:
First, the departing spouse may no longer want to be obligated on the existing loan, especially if they are forfeiting their ownership stake in the property. In essence, they want to protect their credit and cut all ties to the property.
Secondly, pulling cash-out from the home may be the only way to access funds to complete a buyout or any equalization payments.
On the other hand, there are several other reasons to refinance a home in divorce despite not being required to as part of your divorce settlement.
What are other reasons to refinance your mortgage in divorce?
So you’ve been “awarded” the house.
Now, it’s time to make some prudent financial decisions to benefit yourself in the long run.
The house is a great place to start if you are looking to leverage yourself to access cash, consolidate debt, or lower your monthly mortgage payments.
Here are some common approaches:
Tap into your home’s equity for reasons other than a buyout.
With rising home prices and historically low interest rates, by refinancing your home, you can gain access to low-cost capital as a source of liquidity. You may want to consolidate your debts such as credit cards, student loans, auto loans, and other burdensome obligations.
You may also want to establish a cash reserve if the divorce had a major impact on your liquidity, or cash on hand. These funds can also be used to complete those long-overdue home improvements, cosmetic repairs, or larger add-ons.
Alternatively, the money can be used for other investments such as stocks and bonds, and other real estate.
Lock in fixed payments.
Did you know about 10% of all homeowners have adjustable rate mortgages (ARMs)? What does this mean? It means the payments can fluctuate either up or down after a fixed payment period expires.
For example, 5 years ago you financed a loan using a 7/1 ARM product. This is a 30 year loan that has a fixed interest rate for the 1st 7 years. After year 7, your rate will change based on current market rates. It is not a comfortable position to be running with a mortgage with a rate that will adjust two years from now – especially if you intend to keep the property beyond the next 2 years.
For this reason, you may want to refinance into a new 7/1 ARM product for the benefit of 7 more years under a fixed rate agreement. Even more secure is the option of refinancing into a fully fixed rate product such as a 10, 15, 20, or 30 year fixed rate loan.
While ARM products usually come with lower cost initially, the trade-off is that there is a certain amount of uncertainty down the road once the introductory fixed rate period is about to expire. There is a certain level of piece of mind to having your interest rate fixed for the foreseeable future, or at least until you anticipate selling the home.
A divorce already creates a fair amount of unanswered questions in your life, and by refinancing with a fixed rate loan, you know exactly what your monthly payments will be for years to come.
Lower your mortgage payment.
Rates have come down quite a bit in recent years and are now down near historic lows. A refinance may enable you to lower your mortgage payment and improve your monthly cash flow.
After all, cash flow is a common concern for spouses’ following a divorce. It’s worth it to keep your finger on the pulse of the mortgage market and identify opportunities for locking in a lower rate and payment.
If the goal is to lower your monthly mortgage payments, keep in mind that refinancing into a higher interest rate doesn’t always equate to a higher monthly payment. Let me explain:
Your current loan was financed 10 years ago for $500,000 at a rate of 3.75%. Your monthly payment is $2,316/month, and the mortgage term is for 30 years.
Today (10 years later) your mortgage balance is $385,000, and your monthly payment remains at $2,316/month.
Here’s the catch…
By refinancing the current balance of $385,000 into a new 30 year loan at a higher interest rate, let’s say 4.25%, your monthly payment will actually fall to $1,894/month. This equates to monthly savings of a whopping $422/month!
Simply put, you’ve extended the mortgage payments for another 30 years, whereas you only had 20 years remaining on your old loan.
In the long run, this could be significantly more costly in terms of total interest spent over the life of the loan. Again, it all depends what your goals are.
In this case, the goal was to lower your monthly mortgage payments. We’ve demonstrated that despite the misconception, a higher rate doesn’t always mean a higher payment.
For a deeper dive into the reasons for refinancing your home in divorce, check out this Forbes article Til the House Do Us Part: Top 5 Reasons to Refinance After Divorce.
Assuming your mortgage in a divorce
Is the interest rate on your current mortgage too good to let go of? Do you want to keep the house AND the current loan terms?
Well, you’re in luck (maybe).
The alternative: an Assumable Mortgage.
What is an assumable mortgage and how does it work?
Simply put, assuming a mortgage is like inheriting the current loan. It’s when a joint mortgage is transferred into the name of one spouse alone. The inheriting spouse then gets to retain their current mortgage rate (hopefully it’s better than current market rates) and maintain the same monthly mortgage payment, all while accomplishing the ultimate goal of removing their spouse from the loan.
While this might sound attractive in theory, one’s ability to successfully assume a loan is far less likely than most refinance proposals.
With the rise in popularity of assumable mortgages, there are many misconceptions to be addressed.
Misconception #1: All loans can be assumed
Truth: Most loans do not allow for assumptions. A loan assumption is a ‘feature’ of a loan product. Not all loans have this assumable ‘feature.
How do you know if your loan has an assumable feature or not?
You’ll want to dust off a copy of your old Promissory Note (or call the bank for a copy). The Note reflects the terms of your existing loan. This Note will explicitly tell you whether your loan can or cannot be assumed. ALWAYS start here.
Misconception #2: Qualifying is not required to assume a loan
Truth: Similar to a refinance, the spouse hoping to assume their loan will still need to go through the typical approval process. This includes submitting financials, bank statements, credit reports, and everything in between.
Like a refinance, one will need to demonstrate that they can afford to maintain payments on their own based on their overall profile. If you don’t qualify for a refinance, chances are you won’t qualify for a loan assumption either.
Misconception #3: Assuming a loan will protect my payment from rising
Truth: As we demonstrated earlier, a higher rate doesn’t always equate to a higher payment. For example, refinancing your loan into a higher rate but over a new 30 year term can actually reduce your monthly payment. Whether it makes sense or not boils down to your goals.
If the goal is to minimize your monthly expenses, then a refinance (despite the rate) might be the better option.
If the goal is to minimize the amount of interest paid over the life of the loan, then an assumption may be the best option.
Of course, you’ll want to be sure that your current rate is better than the current market rates. And to reiterate, you’ll want to be sure that your loan can actually be assumed before you pursue such an arduous process.
At the end of the day, assumable mortgages can be attractive. However, the success rate for securing an assumable loan is poor at best.
Costs of Refinancing the Home
Nothing is free in this world (except for our content!), and the same goes for applying for a new mortgage.
Here are some common fees and costs that you are likely to incur for refinancing your home:
Lender Origination Fee ($750 – $1500)
A lender origination is a fixed fee that the bank charges for their time and effort.
Loan Discount Points (0% – 3% of loan amount)
A discount point is a fee you can pay to secure a lower interest rate. Think of it this way – any interest rate you want is theoretically available, it’s just a matter of how much that rate will cost you.
Paying additional fees to get a better rate makes sense to an extent. Discount points are also tax-deductible just like the interest you pay on your mortgage is tax-deductible.
Appraisal fee ($350 to $1250)
Most banks require an appraisal by their own appraisal management company. The fee can vary based on property value and complexity or uniqueness. Most appraisals are not transferable between lenders, which means even if you had one done in the past few months, the bank may still require a new inspection.
Escrow/Title Fees ($500 to $1,500)
An escrow and/or title company is a 3rd party to your mortgage transaction. They are the intermediary, and any funds exchanged pursuant to the transaction will run through an escrow company. This is an estimated fee range for typical escrow and title services.
Recording Fees ($250-$500)
Any and all deeds executed during the loan process, which includes the Deed of Trust, are recorded at the local County Clerks office. Yes, the County gets paid too.
Title Insurance ($750 to $1,500)
This is an insurance policy, required for every new loan, which ensures there are no hidden liens on the property and that you are given a clean title. If any errors pop up down the road, or anyone tries to make a claim on your property, this title insurance is your protection.
Notary Fees ($75 – $200)
All loan documents, specifically the Deeds that are to be recorded, require signature in the presence of a notary. The escrow company handling your transaction is responsible for setting up a notary through one of their approved vendors.
The notary fee can vary based on the amount of documents that need to be notarized. The fee can also fluctuate depending on whether the signing takes place in the escrow office (cheapest option), or if the notary is required to travel – for example, to your home or office.
There may or may not be a charge for paying off your loan earlier – although the chances are there is not. It’s always best to check with your current lender to be sure. However, prepayment penalties seem to be a thing of the past, and most mortgage secured after the recession in 2008 do not have any prepayment penalty features.
Common Real Estate Deeds Used in Divorce
Whether your updating ownership on your current home, or purchasing a new home, you’ll often hear a number of confusing terms being thrown around.
It is easy to mistake property title and property deeds as one in the same.
However, they are two completely different legal concepts and the terms should not be used interchangeably.
What is the difference between a property title and property deed?
Title is a legal way of claiming ownership to a particular piece of real estate. Therefore, title refers to ones level of ownership of a given property. It signals that the property belongs to them, the title holder, and that they have rights to use the property.
One’s interest in a property can either be in full, or partial, depending on whether there are other title holders, or owners of record.
When someone has title to a property, they also have the benefit of being able to transfer their interest, or even a portion of their interest, to someone else. This commonly occurs in divorce transaction when one spouse is being bought out of their share in the home, and title is transferred from ‘joint’ ownership into one spouse’s name as ‘sole owner’.
On the flip side, deeds are the physical legal forms that are signed and recorded in order to complete the transfer of one’s interest. Most deeds, depending on the State, need to be filed and recorded with the County Clerk or Assessor’s office in order for them to become official, once they have been signed and notarized.
In short, title equals ownership. Deeds are the instruments used to change this ownership.
What is the process for filing deeds? Are there tax consequences?
Deed requirements, and the process for changing title to a property using deeds, can vary from state to state.
In addition, transferring title to a property may also carry tax consequences which can vary depending on where the property is located – even down to the specific County. For example, some Counties may charge a County transfer tax for removing one spouse from title.
For this reason, it’s always best to check with a local attorney or local title officer to understand the impact of filing various deeds in your State.
What are some common deeds used in divorce?
There are several deeds that can be used when transferring ownership in a property. Some of these are distinct from one another, while others may be used interchangeably.
Here’s a glimpse into some common deeds pursuant to a divorce settlement:
Interspousal Transfer Deed – This is a deed that transfers ownership between spouses in a divorce.
In California, this type of Deed is considered a ‘transfer’ of ownership rather than a ‘change’ in ownership. For example, one spouse may wish to transfer their separate property interest in a home to their spouse, without impacting the classification of separate property vs. marital property.
Grant Deed – A grant deed, similar to an interspousal deed, is used in some states to transfer real estate from one person to another.
The party transferring their share is referred to as the Grantor, and the recipient is referred to as the Grantee.
The primary difference between a Grant Deed and an Interspousal Deeds is that one is used to transfer ownership between a married couple, while the other is used to transfer title to anyone.
Quitclaim Deed – Also referred to as ‘Quick Claim Deeds’ due to the speed at which these can transfer real estate. These deeds are common in divorce.
For example, one spouse may want to end or terminate their interest or claim in a marital home titled jointly. In essence, this grants the spouse on the receiving end their full, unencumbered right to the property.
In divorce, if a spouse acquires or is awarded the marital house, the departing spouse could sign a quitclaim deed removing their interest in the property both quickly and inexpensively.
Alternatively, a quitclaim deed can be used to reinforce one spouses separate property interest in a home. This would ensure that the property remains classified as their separate property, rather than converting to a marital property classification.
A quitclaim deed does not guarantee that the Grantor actually holds title to the property.
Warranty Deed – A warranty deed is used in scenarios where there is a buyer and a seller involved.
This deed indicates that there are certain warranties being made between the buyer and the seller.
For example, one of the primary warranties associated with this deed is that the Grantor (seller) has an ownership stake in the home AND that they have the right to transfer of sell this ownership stake to the Grantee (buyer).
The quitclaim deed we described in the same example does not come with such reassurances.
Deed of Trust – A Deed of Trust is a completely different kind of deed than the ones above which transfer ownership between two parties. These longer, more detailed deeds can be anywhere from 3 – 15 pages in length.
There are always 3 parties associated with a Deed of Trust. Those parties are 1) a borrower, 2) a lender, and 3) a trustee.
In essence, the lender lends the borrowers funds. The borrower signs a promissory Note for the debt they’ve incurred.
In some States, the borrower might transfer legal title to the Trustee (who is a neutral 3rd party). The Trustee then holds the home until the mortgage is paid off.
In other States, the Trustee will simply place a mortgage lien on the home.
These are just a few of the more common deeds that are seen in divorce.
It’s imperative that you verify which deed forms to use, and the process for filing them, specific to your state.
Getting Help from Key Professionals
It is commonly accepted practice to retain a family law attorney to assist you with your divorce.
The vast majority of divorces will require a competent and experienced litigator who can work through the procedural requirements, advise you on legal issues, conduct negotiations for you, and if needed, represent you in court.
However, there are several other professionals you should also consider to assist you through various parts of your divorce as well.
Their specialized knowledge can ease your anxiety, save you from making financial missteps and help you survive the divorce process so that you can move forward as quickly as possible with the next part of your life.
When it comes to issues regarding your home and your mortgage, you would be wise to consider retaining the services of a divorce mortgage advisor.
If you have home ownership questions related to divorce, or you are considering buying a new house, you will benefit greatly from the in-depth insights a divorce mortgage advisor will have about the divorce process and divorce-specific underwriting guidelines.
By performing a detailed underwriting analysis, a divorce mortgage advisor can offer guidance on how the mortgage fits into your settlement strategy.
For instance, if you want to keep the house, it’s important to determine whether you qualify to refinance (taking spousal and child support obligations into consideration).
While it’s true that divorce is a highly legal process, there are also several financial implications to a divorce as well. That’s why it may be a smart move to also consider retaining the services of a divorce financial advisor.
If your divorce is complex and there are complicated financial and tax implications, a divorce financial advisor can offer creative solutions, evaluate settlement proposals, and help you understand the long-term impact of your decisions.
At a minimum, you’ll want to retain a Certified Divorce Financial Analyst (CDFA), but you’ll enjoy several added benefits if that financial professional is also a Certified Financial Planner (CFP).
A CDFA has specialized training in the financial and tax aspects of divorce, while a CFP has broad expertise across all facets of financial planning.
In some cases, you may also want to retain a forensic accountant. This can prove especially valuable when a spouse is reluctant to reveal their true income, or you suspect they may be hiding assets.
Some forensic accountants are also business valuation experts and can assess the valuation of any privately held business interests.
Last but not least, consider working with a therapist to help you handle any anxiety, fear or other negative emotions you may be experiencing.
Your friends and family may be able to provide you with strong emotional support, but a good Marriage and Family Therapist will be able to help focus strategies that will also help you keep the lines of communication open with your spouse and even help to negotiate a parenting plan that is in the best interests of any children in the marriage.
Now that we’ve gone over the nitty-gritty details, here are 14 key facts you need to remember about your home and mortgage in a divorce.
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