One of the biggest challenges of any divorce proceeding is deciding what to do with the family home. Following the disruption of a marriage, it can often be difficult to separate combined finances, assets, and payments.
Whether you are in the midst of a divorce, breaking up with a long-term partner, or simply looking to move out of your cosigned home, understanding the legal proceedings that might come with dividing a mortgage can help you remain in control of your financial situation.
Keep in mind and note that the content of this article and this article itself is not meant to be taken as legal advice or substitute legal advice and guidance that should be provided to you by a qualified lawyer or other legal professional.
What Happens to Your Mortgage After Divorce?
Before getting divorced, you and your former partner will likely sign a Separation Agreement. This contract will break down custody of children, division of resources, and ownership of assets. Your Separation Agreement will also outline the division of major debts, including your mortgage. The Separation Agreement will deal with the financial obligations and divisions that come with ending your marriage. A divorce, which usually occurs thereafter, is the legal annulment of your marriage which allows you to remarry.
If possible and feasible, you should try to cooperate with your former spouse to reach a mutually-beneficial agreement. The goal is to settle your finances as quickly and fairly as possible so that you may part ways without too many added complications. In less amicable cases, the separation agreement may involve going to court and hiring a family lawyer which can become a much more expensive option. In the worst-case scenario, one of you, or both of you, may risk pushing the other into foreclosure and bankruptcy.
Before finalizing your Separation Agreement, it is very important to consider the distribution of custody and child support payments. This section in particular will play a huge role in your ability to re-qualify for a mortgage. When approving you for a mortgage, lenders will take into account your other financial commitments. Any payment obligations you incur through your Separation Agreement will impact the loan size you can qualify for and may impact your rates. Conversely, any child support payments that you are mandated to receive can count towards increasing your income for your mortgage application. This might help improve your chances of getting approved for a higher mortgage amount with more favorable terms.
Once your separation agreement is in order, you can focus on deciding how to proceed with your mortgage. Even if you are no longer living together, both partners will be held liable for the mortgage so long as you are both co-signers of the contract. In this scenario, you will be held financially liable for your partner’s repayments, and they will be held liable for yours, even if one or both of you no longer occupy the property. If your partner fails to make one of their monthly payments, your credit score will also be negatively affected as will theirs if you fail to make your monthly payments. As such, it might be beneficial for you to both rethink and potentially refinance your mortgage or sell the matrimonial home. Again, please consult a qualified legal professional for advice on what you should do as this is not legal advice. We do not provide legal advice and are not qualified to do so.
Sell vs. Stay: What are Your Options?
Dividing up your assets can be a daunting process. When it comes to your home, there are a few options you can consider.
You Both Agree to Sell
Selling your home might be one of the easiest ways to divide up your assets. If you and your former partner agree to sell your home, you can use the money from the sale to pay off the remaining balance of your mortgage. Once you have paid back your lender, you can also use the money to pay off your realtor and processing fees. The remaining cash can be split 50/50 or based on your individual mortgage contributions. This can all be outlined in your separation agreement.
Some of the other options listed below require one or more partners to be approved for a mortgage on their own, whereas they may have had previously applied as a unit. If you are not approved to take on the mortgage alone, the default will be to either sell the home and split the profits or have a friend or family member come on the application as a co-signer. Selling your home is not only an extremely popular option, but can also be an effective failsafe.
One of You Keeps the Home: Little to No Equity
If you have entered into a mortgage agreement and have little to no equity in your home, one partner may be able to stay within the home while the other leaves. The partner that wishes to leave may apply for a release of covenant from their current mortgage contract. The remaining partner must refinance the mortgage in their own name— which means they need to meet the requirements to qualify for the mortgage by themselves.
Because there is not a significant amount of equity in the home, the partner that stays will likely be able to pay back their former spouse out of pocket. When calculating payment, it is also important to take into account the minor legal and processing fees you will likely incur.
One of You Keeps the Home: Significant Equity
If one of you are intending on keeping the house, but do not have enough cash to buy out your partner’s equity, there are still a few options you can consider. Through refinancing, you may be able to release your partner from the mortgage, while adding the repaid equity back into your payment plan. By working with a Clover Mortgage broker, you can ensure that you acquire the best rates and terms available to you through a refinanced mortgage agreement.
Not Enough Equity to Sell
In some cases, you may have negative equity in your home. This occurs when there is not enough equity to sell or even refinance your home. In this situation, you unfortunately might be mandated to keep the house and mortgage in both of your names until you can build enough equity to qualify for a sale or a refinanced mortgage.
Luckily, you do not have to live in the house while you do so. With permission from your lender, you may be able to lease out your home for a period of time, using the rent payments to build up equity, before eventually proceeding with one of the options outlined above.
Refinancing Your Mortgage
Determining how to divide assets and money can be a difficult process for anyone going through a divorce or separation. If you do not want to sell your co-owned home, refinancing your mortgage might allow you to buy out your partner’s equity and remove them from the mortgage contract. Removing your partner from your contract will protect them from any future penalties you incur, while also guaranteeing you 100% of the profits from future sales.
Through refinancing, you can opt to own the home yourself or with someone else. If you unable to afford the home with a single income, you can also consider leasing out part of the house or finding a new person to co-sign with you. It is also important to note that refinancing your mortgage often leads to a penalty for breaking your previous mortgage contract early depending on the type of mortgage you had prior to going into the refinance.
Refinancing your mortgage during a divorce can be a tricky process. Luckily, Clover Mortgage is here to help. Unlike many brokerages, we work and fund mortgages with over 50 different lenders. We know our network of lenders like the back of our hand, giving us the expertise to connect you with the perfect loan and help you get cheaper rates, better conditions, longer amortization periods, or additional cash. We will gladly work with you and your family lawyer to help ensure that you are getting the best solution for your needs during this challenging time of your life.
Each buyer is unique, and each mortgage lender will differ in their offerings and products. Our Clover Mortgage team of underwriters is highly skilled and has access to hundreds of different mortgage products through our network of lenders. We will work with your best interest in mind and find a loan that meets your unique requirements.
If you are ready to begin looking for a new mortgage or mortgage refinance, contact us today for a free consultation!