If you’re considering divorce, the first question for most couples is: “What should we do with the house?”
The family home is usually the biggest asset to divide. Plus, it’s more than just property. You may have ties to the neighborhood, your kids are happy in their school, and you’ve invested time, energy and love into creating a home there.
If one spouse decides to keep the house in a divorce, refinancing gives you a way to access the equity in the home so one spouse can buy out the other. There are some mortgages during a divorce, but armed with the right knowledge, you can protect yourself financially and do what’s best for your family.
As a divorce mortgage specialist, I’ve seen lots of different scenarios and fielded many questions from anxious couples trying to figure things out. To help you prepare, here are four of the most common questions and how to deal with them.
1. Do we have to refinance the house in a divorce? Can’t we have one spouse’s name removed from the deed?
This is a common misunderstanding that can have serious consequences. If you sign a Quit Claim Deed, it will remove your name from the deed, which means you are no longer the owner of the home. But this is something completely separate from the mortgage. If the mortgage is still in both your names, you are still liable for the debt.
This also means:
- If your ex-spouse stops making payments or goes into default, it will affect your credit.
- If your ex-spouse has any future liens filed against him/her, they can be attached to the house, making it harder to sell in the future.
- If you want to buy a new home, having this mortgage in your name will increase your debt-to-income ratio, reducing your chances of being approved and/or increasing your interest rate.
Remember, taking your name off the deed doesn’t remove your liability for the mortgage.
2. At what stage of divorce should we start the refinance application process?
As soon as you both know that one of you wants to keep the home, start the application process. The mortgage you have right now was based on the income and credit scores of both spouses, so there’s a chance that the lender won’t approve one spouse on their own. By starting early, you can be prepared for this possibility, and have some alternative options in mind – whether that’s waiting until the credit score improves, a spouse’s income increases, reapplying to another lender, or negotiating other sources of income in the settlement instead of the real estate equity.
3. The bank is asking for a copy of our divorce decree as a condition for the loan. But we can’t finalize the divorce until we’ve refinanced the mortgage. What should we do?
Most lenders, especially larger banking chains, have something called an overlay, which is basically a set of additional conditions for the mortgage on top of those from Fannie Mae, Freddie Mac and HUD. If your bank has an overlay that requires a divorce decree, there are other banks that will work with you. As a mortgage broker, I work with numerous banks that are more flexible in their approach.
Typically, this is what happens:
- It doesn’t come up at all during the loan process.
- They ask that the loan application is marked “married,” since you are both technically married.
- They request a letter of explanation that you are separated with no divorce decree in place as of yet.
Be sure to ask about overlays before you move forward with a mortgage application. If you’ve already been told that they won’t approve it without a divorce decree, you’ll need to reapply with a different lender. See the question below for another option.
4. We have to finalize the divorce now, but the mortgage refinance hasn’t been approved yet. How can I protect myself financially?
If the timing isn’t working out and you need to finalize the divorce before the mortgage is approved, be sure to include language in your marital settlement agreement that one spouse will refinance the home. But remember, this won’t remove your liability in the eyes of the lender. If you are the spouse who is giving up the house, have your partner sign a Deed of Trust to Secure Assumption. This gives you the right to foreclose and take back ownership if he/she fails to refinance and defaults on the mortgage. After the divorce is final, request that your lender notify you of any missed payments.