Important points
If you jointly take out a mortgage with your ex-husband, both of you will be responsible for the debt even after the divorce.
Divorcing couples with joint mortgages typically sell the home, refinance the mortgage in one spouse’s name, or have one spouse buy out the other’s home.
A divorce agreement should include all possible scenarios to protect both parties from financial harm.
One of the biggest decisions facing divorced couples is what to do with their shared home. It’s often an emotional decision, and the situation becomes even more complicated if you have an outstanding mortgage.
We have summarized what you need to know about divorce and mortgages.
Mortgage options during divorce
Depending on the details of your mortgagedivorce status, and other variables may limit your options for dividing your home. Here are some possible next steps.
1. Sell your house
The easiest option is often to sell the home and split the profits. Depending on where you are in the divorce process, you may agree to sell the home while the case is pending, rather than after the settlement.
If you choose this option, and many couples do, consider the cost. These may include real estate agent fees, repair and staging costs, real estate transfer taxes, and capital gains taxes. These costs are typically derived from sales revenue.
Let’s say you and your ex sell your home for about $400,000. First, use the money to pay off your mortgage. If you have a remaining balance of approximately $275,000, you will pay a real estate agent’s commission (typically 5 to 6 percent of the sales price) or buyer’s agent, which would be $24,000 plus closing costs (national average $6,905) ) would be $125,000. . This leaves approximately $94,000 in split costs, subject to state requirements and attorney determination.
2. Mortgage refinancing
Among divorced couples, joint housing loan Refinance to a new mortgage in only one person’s name. This relieves the other party of any responsibility for the mortgage. That person must also be removed from the area. house titleYou can run it with certificate of right to quit.
Remember: Parties applying for a refinance can only use their own income and credit score to qualify, says Jeremy Runnels, CFP, West Coast Financial in San Diego, Calif. . It would certainly be okay to have them as your sole guarantor. ” This could mean less favorable terms, including higher interest rates, given the circumstances. current refinance interest rate.
But if a borrower receives spousal support, Runnels said, if the divorce settlement stipulates that the support will be received for at least three years, that income can be used to qualify for refinancing.
If you decide to keep your home while your ex-husband leaves, you may want to refinance your mortgage. A refinance will pay off your old balance (for example, $275,000 in the example above) and you will receive a new mortgage of the same amount in your name only.
3. Pay your ex-husband his share of the stock.
If you’ve built something substantial, Capital amount In the case of a house, the person managing the house can apply. cash out refinance to buy out the shares of a former partner.
The homeowner must also qualify for a refinance, and cash-out refinance rates can be higher than the interest rate on the original mortgage.
“Their income needs to be high enough that they can handle the new mortgage on their own, and they can’t take out cash for the home,” said Michael Becker, a loan originator at Sierra Pacific Mortgage in Columbia, Maryland. We need to have the capital to do so.” While traditional cash-out refinances are limited to 80% loan-to-value, VA loans can go up to 100%. ”
If you want to keep your home but don’t have enough equity to do a cash-out refinance or to pay your ex-husband his share, the solution may be: Home Equity Line of Credit (HELOC) or home equity loan. “Some financial institutions will loan you up to 95 to 100 percent of the home value,” Becker says.
Let’s say you decide to keep your $400,000 home and pay your ex-husband his share. In this example, you would pay half of $125,000, or $62,500. To get that $62,500, you could refinance your remaining balance ($275,000) plus $62,500 into a new mortgage and use that cash to pay your ex. Alternatively, you could apply for a $62,500 home equity loan, in which case you would be responsible for the new loan payments as well as the mortgage.
4. Other mortgage options after divorce
There are several other mortgage options worth considering during your divorce.
For example, it is possible to keep your mortgage intact, but there may be drawbacks to this approach. Both individuals with the loan are still legally responsible for paying the mortgage, and if one fails to pay, the other will also be affected. Although a divorce agreement should specify who is responsible for paying, there is a risk that one party may not abide by such an agreement.
a Mortgage assumptions This is also a possible approach, but less common. Hypothetically, one mortgage holder transfers the loan to another person, who pays the remaining balance at the mortgage’s existing loan terms and interest rate. Many mortgages don’t allow assumptions, but it’s worth checking with your servicer. If optional, you can also use this process to formalize the change in ownership of your home.
Divorce and mortgage considerations
Consider the long-term financial implications before choosing a course of action. you can ask financial advisor It will help you weigh the pros and cons.
Evaluate home value and assets
Whether you’re planning to refinance your multi-family mortgage or selling your home; professional evaluation to determine its value and the share of shares that the parties must divide.
However, if the ex-couple does not agree with the test results, efforts to move forward may be hampered. The parties should try to agree on the evaluator and accept whatever the outcome of the evaluation is. (Similarly, if you decide to sell your home, you can include a clause in your separation agreement that says you will accept the first offer on the home up to a certain percentage of the list price.)
Keep in mind that your home’s value, or equity, can affect your mortgage options. For example, if you don’t have a lot of equity, it will be more difficult to qualify for a refinance.
Tax implications
Whether you’re selling your home as part of a divorce agreement or buying out your spouse’s share; capital gains tax may appear. This is a tax that is levied when you sell an asset such as a house and make a profit above a certain amount.
If you sell your home, you and your spouse may each be able to deduct up to $250,000 of the gain from your federal taxable income, but this is only if you have lived in your primary residence for at least two of the past five years. Applies only to sale.
There are also tax considerations when it comes to paying spousal support. The spouse who earns a higher income and pays spousal support cannot deduct the payment from taxable income, but the spouse receiving support does not have to report it as income.
Runnels said higher-income spouses may insist on reducing their spousal support payments, which could reduce the receiving spouse’s income and prevent them from qualifying for new loans. It is said that there is.
Conversely, paying spousal support can hurt the payer’s income and mortgage opportunities.
protect your credit
Divorce is an emotional and often volatile event, but the worst thing divorcing couples do is take financial revenge.
“Time and time again, I’ve seen one or both spouses discredit the other spouse out of bitterness,” Becker says. “They’ll think it’s someone else’s problem and refuse to pay your bills in a joint account. This will seriously damage your credit and potentially prevent you from getting a mortgage for a long time. ”
Bottom line: Continue to pay all your bills throughout the divorce process. Protect your credit.
“Close your joint account and set up your own account,” Runnels says. “If your credit is damaged by arguing with your spouse over who pays the bills, it will be even more difficult to get a loan.”
FAQ
Additional reporting by Erik Martin
