Breaking Up With a Low Mortgage Rate Is Hard
Divorce isn’t just an emotional process, it’s also a financial one. For some couples, the decision to stay together is driven by a desire to provide stability for the children. For others, the lure of a low mortgage interest rate creates a financial tether that’s hard to break. If you’ve made the decision to separate, then it’s important to know your options.
Who Keeps the Mortgage After a Divorce?
Divorce decrees will typically award the home to one party, or mandate that the home is to be sold. Unfortunately, lenders don’t just remove a mortgage liability because a divorce decree says so. A refinance or a sale will.
Option 1: Taking over an existing joint mortgage loan
If a mortgage refinance doesn’t take place, then one person could find themselves in a position where they still have liability on a home they no longer have an ownership interest in.
If you are the said spouse who gave up ownership but kept liability, you can still apply and qualify for a new mortgage loan. The old mortgage debt can be excluded as long as you can prove your ex-spouse is making payments from their own funds, and the loan stays current.
The danger here is if the ex-spouse falls behind on their mortgage, which will damage your credit score, and potentially cause issues when you try to get a mortgage loan in the future. It’s not worth the stress.
Option 2: Refinancing to Remove Your Ex
A mortgage refinance will allow one spouse to take full responsibility for the mortgage.
If you’re that person, then you need to have enough income to qualify for the mortgage loan on your own, or with the help of a co-signer (who may or may not live with you). Your new mortgage loan will likely include an ex-spouse buy-out.
Your new mortgage loan that you have to qualify for then becomes the existing mortgage payoff + the ex-spousal buy-out + half the refinance closing costs (or whatever agreement you decided on in the divorce process).
The good news is that as long as you don’t receive cash back in the process, the refinance is considered a “rate and term” refinance, which has a better interest rate than a “cash-out” refinance.
Option 3: Selling the Home and Splitting the Proceeds
If neither spouse can qualify to refinance then selling might be your best option. Any remaining equity can be divided per the divorce agreement, and both parties can start fresh. Make sure that the mortgage payments are still made on time until the home sells, as late payments can hinder your ability to get a new mortgage loan after it’s all said and done.
What If You Need to Buy a New Home After Divorce?
If you’re the spouse moving out, of if your previous home was sold and the equity shared, you may be wondering how soon you can qualify for a new mortgage loan.
Assuming the joint accounts were handled properly, and your credit score and income are in good shape, then there’s no waiting period. You’ll even be considered a first time homebuyer if the only home you’ve owned in the past 3 years has been a home owned jointly with your ex-spouse. This may open avenues for down payment assistance should you be eligible.
If you’re still liable for the mortgage that your ex-spouse took over, lenders will generally allow that debt to be excluded from your debt as long as the mortgage stays current (no late payments).
If you’re the one paying alimony or child support, then those debts will be counted against you, potentially making it harder to qualify.
If you’re the one receiving alimony or child support, then you can use it as stable income as long as the payments are likely to continue for at least 3 years, and once you can show 6 months of on time payments received. Please make sure to handle other shared expenses (such as for the kids) separately, and not deduct them from the amount of child support or alimony due – this can create issues with the payment documentation required by a mortgage lender.
Having the Confidence of Numbers
Whether you’re refinancing to keep an existing home, or wondering if you’ll be able to qualify for a new purchase, having a plan in place can help make the transition smoother. If you need expert mortgage guidance, I’m here to help you understand your options. You can email me at [email protected] or use the secure online application link to submit a loan application.
