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The emotional impact of a divorce is bad enough, but financial concerns can make the process even more stressful. And if you and your spouse own a home, one of the biggest questions in a divorce is what to do with it. If you plan to stay living in the home post-divorce, refinancing the existing mortgage is often the most straightforward option, but it's not always your best financial move.
While many divorce agreements require you to refinance the home, you may have other options that don't require you to refinance your home. Let's review some options to consider if you don't want to refinance your mortgage after your divorce.
What's Typically Required in a Divorce?
If neither you nor your ex-spouse can afford to live in the home and make monthly mortgage payments, there may be no other choice but to sell it. If you want to keep the home post-divorce, one of the most common options is to refinance it.
However, refinancing may not make financial sense due to rising interest rates. Additionally, going from two incomes to one can impact your eligibility for a new mortgage. Before you make any moves, consider all your options with the help of your divorce attorney and financial advisor.
One easy way to keep the home without refinancing is through a mortgage assumption, where your lender allows you to transfer the mortgage to your name. Lenders are not required to grant mortgage assumptions, even if you and your former spouse agree to one. They may require copies of your divorce decree and an executed and filed quit claim deed to remove your former spouse's attachment and liability on the mortgage.
Unfortunately, conventional mortgages are rarely assumable, but you may be in luck with a government-insured loan from the Federal Housing Administration (FHA), Department of Veterans Affairs (VA) or United States Department of Agriculture (USDA). These federally backed loans are assumable, but you must meet certain requirements and your lender's eligibility criteria.
Agree to Co-Own
Many couples opt to co-own the home after a divorce. Co-owning your home may make sense in certain situations, such as if you're underwater on the mortgage or if you want to prevent your children from having to move.
However, this option is not without risk, as both you and your former spouse will remain on the existing loan and be responsible for the payments. It's a good idea to add provisions in your divorce decree about who will pay the mortgage payments or what percentage of the payments each of you will make.
You could draw up an agreement in your settlement that keeps your ex on the mortgage but prevents them from receiving any appreciated value in the home beyond a specified date. Of course, you'll want to have your attorney review the agreement to ensure your interests are protected.
Buy Out Your Ex
Many state divorce courts will order both parties to split the home's equity. While you can refinance the home and use the home's equity to cash out your former spouse, you have other options, such as:
- Liquidate your assets. You could sell assets you receive from your divorce, like bank accounts, real estate and furniture. Proceeds could be given to your former spouse to pay off any equity they are entitled to.
- Trade your marital assets. One common method to buy out a spouse is to forfeit your share of marital investments, retirement accounts or other assets equal to the buyout amount. While buying out your spouse in this manner can help you retitle the home in your name, your spouse is still at risk as their name is still on the mortgage.
- Creating a legal agreement. You may be able to add language to your divorce agreement or create another legally binding agreement to help buy out your ex. For example, your agreement could stipulate that you will pay your former spouse a certain amount each month until their financial interests are met.
Once you buy out your spouse's financial interest in your home, you'll still need to remove their name from the deed to avoid future issues if you eventually decide to sell your home. This can be achieved through a quit claim deed, a document that releases a party's legal right to a property.
Wait to Refinance
Another option to avoid refinancing your mortgage now is to simply wait and refinance later when interest rates drop, you earn more equity in the home or you're in a better position to qualify for a mortgage. This option can be risky if you're unable to buy out your ex since you'll both be liable for making the mortgage payments.
In this case, you may need to draw up an agreement detailing who will make the monthly mortgage payments. For instance, your agreement could stipulate that you must split the mortgage payment 50/50 or that you can live in the home, but your ex is responsible for making the payment, or vice-versa.
Protect Your Credit
Even when couples work together harmoniously to create a workable divorce agreement, unforeseen events can take place in the future that can impact your finances. So if you co-own your home and your name is still on the home loan, your credit could be at risk if your former spouse is unable to make the monthly mortgage payments.
Lenders rarely allow you to remove a co-borrower from the mortgage, preferring that you pay off your loan or refinance it in your name. If you don't want to refinance, consider the strategies above to buy out your ex-spouse or co-own your home until your situation improves.
If you do want to refinance, take stock of your credit by checking your credit score and credit report for free and take steps to get your credit ready before applying for a new mortgage.
Consult your divorce attorney and your accountant or financial advisor before making any moves regarding your home that could put your interests at risk.