Splitting up is hard. It's even harder when you own a home together.
Deciding how to handle a joint financial agreement like a mortgage in the midst of this process can make a divorce feel even more complicated.
You may be wondering how to keep your house, whether you’ll have to refinance, or how to remove your spouse from the mortgage after the divorce. The answers to these questions aren’t straightforward. But it may help to frame your mortgage as a project to resolve that’s separate from your divorce because, really, it is.
Your mortgage loan agreement is a legally binding contract separate from any divorce agreement. Even in an amicable divorce, if both of your names are on the mortgage, your lender has to agree to any changes to the mortgage document.
How to get out of a shared mortgage
There are three basic ways out of a shared mortgage in the event of a divorce:
- Sell. Close out the mortgage by selling the house, then split what’s left as part of the divorce agreement.
- Pick one owner. One spouse keeps the house and refinances to get the other off the mortgage. (It’s usually not possible for the party who stays to assume the existing mortgage – more on that below.)
- Hold. If financial circumstances prevent you from making a change right away, you may opt to share the house temporarily while you wait for better financial conditions. Even as your divorce moves forward, you’re not required to make any changes to the mortgage until one of you is in a position to refinance on your own or the house sells.
Let’s look at the logistics of updating your mortgage (and your homeowners insurance), and run through the most common mortgage arrangements.
Even in an amicable divorce, if both of your names are on the mortgage, your lender has to agree to any changes to the mortgage document.
Removing a spouse from a mortgage after divorce
If you own a home with your spouse, it’s likely that both of you are on the mortgage and on the title deed. Make sure both are updated after your divorce, however you choose to proceed.
Here are some options for how to handle the mortgage after a divorce.
Option 1: Sell the house and split what’s left
Identify who is staying in the house and who is leaving. Before you apply to refinance after a divorce, you’ll need to know if the person who’s staying is 100 percent responsible for the mortgage and whether there will be alimony.
You’ll also need to get a quitclaim deed to remove your former spouse from the title. (Your homeowners insurance company will want a copy of this as well.)
Until your refinance agreement is final, the person who’s leaving the house isn’t released from the liability of the mortgage and will need to stay on the insurance policy until they have been removed from the mortgage agreement.
With the proceeds from selling the property, you can repay the loan you took out (your mortgage), and split any money left over with your former spouse. Goodbye, shared mortgage!
In this case and the next, be ready to pay capital gains tax on any income from the sale.
Option 2: Buy the other out
It’s common in divorce for one spouse to try to buy the other out and take 100 percent ownership of the house. In this case, the person who will remain on the title would get a quitclaim deed and write a check for the agreed-upon equity. (And, of course, update the home’s insurance policy accordingly.)
Refinancing may or may not make sense for you based on a number of factors at the time of your divorce, including current interest rates, your individual credit score, and how far into your mortgage you are. If you’re within the first two or three years of paying off your mortgage, you’ll approach this differently than if you’re in year 10 of a 30-year mortgage.
Refinancing 10 years in may mean that your payment goes down significantly each month, whereas it’s likely to go up if you’re in the first two years and still mostly paying off interest. Your homeowners insurance payments may also increase significantly, as you’ll be the only one liable for the property.
Option 3: Keep the mortgage as is for now
In this scenario, both spouses stay on the mortgage, though one may move out of the house. This may happen if neither spouse has the financial wherewithal to assume the mortgage independently.
Things are more complicated when both spouses stay on the mortgage for an interim period after the divorce. In the event that your former spouse who is no longer living in the house stops making payments, language in a divorce decree outlining their financial obligations can be difficult to enforce. And delinquency or late payments impact everyone’s credit score.
Still, if neither of you qualifies to refinance independently (as you’d need to do to assume the mortgage), you may want to hold where you are. If you opt to live with the mortgage as is, you’ll both need to stay on the homeowners insurance as part of the mortgage loan agreement.
If both parties stay on temporarily, the divorce agreement will typically define a certain amount of time in which one or both parties must get their income, credit, or rate qualifications within range for refinancing or a buy-out.
In this case, you’ll need to maintain your home inventory, as major changes are likely to occur if one party moves out and scheduled items change hands. You’ll also want to do your best to avoid homeowners insurance claims while you await a resolution.
Option 4: Assume the mortgage
You may be wondering why it isn’t possible for one party to assume full responsibility for the existing mortgage after a divorce. The answer is that this may be an option, but most mortgages are not assumable and the fees involved can be high. If you are interested in more information, contact your mortgage lender directly to ask if you are eligible.
Option 5: No mortgage, no problem (probably)
Of course, in situations in which there’s no mortgage and you own your property outright, the transfer of property in a divorce is much simpler – it’s just a transfer of ownership. The sole owner will need a deed recorded to remove the former spouse. They’ll also need to contact the insurance company to update their home insurance policy.
No matter the option, protect yourself from liability
Untangling yourself from a shared mortgage can be complicated. But that doesn’t mean you can’t approach this head-on. (Though you may need to seek legal counsel at some point.)
To get insight on how to approach this process, we spoke with mortgage expert Neda Mohammadi, the director of national sales operations at LendUS. Mohammadi is also a loan advisor, and she offered up a credo for those going through a divorce: “Stay current.”
What she means by this is, “always stay current on your liabilities.” No matter who is living in the house or responsible for paying, as long as both of your names are on the mortgage, don’t let your mortgage fall behind.
“As soon as you fall behind, you’ll limit your ability to get other financing for 12 to 24 months,“ she said, which means you won’t have the opportunity to buy a new home.
“The same thing goes for property taxes,” she added. “Delinquency or penalties start adding on. This gets very costly the longer it goes on. It gets very hard to catch up.” And this can hinder everyone’s financial future and the speed of divorce proceedings.
When in doubt, get counsel
Ultimately, there are many options for refinancing to remove your former spouse from your mortgage. You should start by speaking with your divorce lawyer or by reaching out to your lender directly to find out more about their process for applying for changes.
Modifying a mortgage is rarely swift or cheap; you will encounter fees throughout this process, and they may be significant. But in the end, with the right help, you may end up with a better monthly payment for your new budget.
Even in an amicable divorce, do not rely on your former partner to make financial decisions or keep up mortgage payments. Whether or not you’re the one keeping the house in the divorce, protect yourself to ward off legal trouble down the road.