Love may fade and marriages may end, but that doesn’t mean your financial obligations end with them. Financial matters are one of the top-cited reasons for divorce filing, and those issues become even more so during the course of a divorce proceeding. Of all financial assets and liabilities, a mortgage is often the biggest – and the most hotly contested. Just as you must untie the knot from your spouse, you must also untie it from your joint mortgage – which can be a harrowing process if you don’t know what you’re doing. Learn how to divorce your mortgage and ensure an equitable distribution.
What Is “Divorcing a Mortgage?”
Divorce has changed in the past couple of decades. In the past, we were concerned with dividing the assets, but a flailing housing market and the Great Recession has us dividing liabilities. In the eyes of mortgage lenders, you remain married until you sell the house or refinance. In today’s volatile market, that’s not always an option.
No matter which route you choose, approaching the situation with a level head is essential. Though divorces are emotional, often-messy affairs, these decisions should be rational and purely financial. If you own a home with your spouse, you have a few options.
Sell the House, Split the Equity
The easiest way to rid yourself of joint debt is to sell the house and split the equity down the middle. This only works if the house is worth about the same or more than what you originally paid for it. If you owe more than what the home is worth, selling it simply doesn’t make sense. If you still think that selling the home is best, your options are hosting a short sale or paying off the difference. Keep in mind, a short sale will have a negative impact on both of your credit scores.
Refinancing Under One Spouse
If selling doesn’t seem to make sense, refinancing your home is another option. This may be a good fit if:
- You’re up-to-date on payments and don’t owe more than the house is worth,
- You have enough credit and income to qualify for a mortgage on your own, and
- The other spouse agrees to relinquish his or her share of the house.
Often, a spouse finds that he or she doesn’t have the funds to qualify for a mortgage and maintain a home. If you’re struggling to decide, ask yourself, “Would I have bought this house if I were single?”
If you want to keep the home but can’t afford to refinance, loan assumption is an option. Some FHA loans will allow assumption, provided you have sufficient income to make payments. Keep in mind, though, that you may end up paying higher interest rates with loan assumption.
Staying Married to Your Current Mortgage
If all other options fail, you’re left with one more, but it should be a last resort – remaining in your current mortgage and ensuring that your ex-spouse keeps up with the mortgage payments. This is risky for obvious reasons: Your credit score is tied to the mortgage and a default could be catastrophic. Only elect this method if you truly have no other option.
Whichever option you choose, it’s essential to keep a level head throughout the process. It may be tempting to keep the house, but ask yourself if it’s truly the best financial decision, or if it’s purely an emotional one. In general, selling the house and splitting the equity is a clean break from the past and a fresh start for the future. Consider each decision carefully, and try to keep things civil with your partner. The faster you divorce your mortgage, the more quickly you’ll be able to move on with your new life.