Divorce and Mortgage: A No-Mess Guide

Divorce and Mortgage: A No-Mess Guide

No one likes to think about divorce if they’re getting married. Everyone hopes to have a great marriage when they meet someone and decide to join their lives together.

Unfortunately, not all marriages last forever. In fact, there are more than 750,000 divorces that happen in the United States each year, one of the highest rates in the entire world. While the good news is that the overall divorce rate has been declining in recent years, the bad news is that they still happen.

And when they do, they can be quite complicated to figure out. Divorces involve un-linking two lives together, separating assets, debts and paternity, in some instances.

One of the most complicated things to figure out during a divorce is what happens to a mortgage when a marriage ends. There are a number of options for what can happen, based on the particular couple’s situation.

Below is a no-mess guide to divorce and mortgages so you can see what your options would be.

Sell the Home

The simplest and most straightforward way to deal with a mortgage during a divorce is to sell the home. In this scenario, you would list the home for sale, just as you would if you were simply moving from one residence to the next with your family.

Both partners would have to agree to the list price of the house and be a part of the negotiation and closing process, as determined during the divorce proceedings. Once the home is sold, the money will be divided up based on how the divorce was decided.

This, of course, assumes that the couple has equity in the home when they sell it. If they have negative equity, then they must decide how to pay off the remaining debt.

Let’s assume that the couple has agreed to an even split of the equity. If the final home sale price is $250,000 and the amount left on the current mortgage is $150,000, it will result in the couple getting $100,000 at the time of sale. This money will then be split so that each party receives $50,000.

Keep the Home

If one person is going to remain in the home after the divorce, then things get a little more complicated. This is especially true if both people are on the mortgage together.

If this happens, there are three main options, depending on the situation and what each person wants.

One Person Takes Over Payments

One option is for the person who is remaining in the home after the divorce to simply take over payments of the house. In this case, nothing would need to be done to the mortgage itself. The person remaining in the home would be the one who is responsible for all the payments.

There are a number of downsides to doing this, though, especially for the person who won’t be living in the home. That person will still technically be on the hook for the entire mortgage.

While the divorce decree may say they’re not responsible for making the payments, the mortgage will still remain on their credit report. This could prevent them from getting a mortgage of their own in the future, or any loan for that matter.

In addition, if the person who remains in the home ends up defaulting on the mortgage, then the person who has left will still see their credit negatively affected — even though they weren’t technically responsible for making the payments.

This is why this option isn’t advised in most situations.

Refinance the Mortgage

The most common option is for the person who is going to remain in the home to refinance the mortgage in their name alone. To do this, they would need to apply for a new mortgage on their own. They would have to go through the same process as when they did when they first obtained the mortgage on the home — only this time, there won’t be a home sale actually happening.

If the divorce decree says that the couple must split the current equity in the home, then the person who’s staying in the home after the divorce must come up with that money. For example, if the couple is determined to have $50,000 in equity in the home at the time of the divorce, and they are splitting it evenly, the person staying in the home must pay the other $25,000.

A common way to come up with that money is to do a cash-out refinance, if it’s available. This means the person staying in the home would take a mortgage for at least $25,000 more than they currently own in the house, and then take that cash to pay it to the other person.

This can only happen, though, if they have enough equity in the home. Mortgage companies will typically only extend a refinanced mortgage if the homeowner retains at least 20% equity at the outset.

Quitclaim Deed

If only one person is on the mortgage, then it becomes a little simpler — as long as the person on the mortgage is the one staying in the home. In this case, you can file a quickclaim deed that will remove your spouse’s name from the home’s title.

Once this is done, the person staying in the home will be the only one to retain rights to the title of the home, and they will continue to be the only one on the mortgage.

If they still owe their spouse for the current equity in the home, they could opt to refinance their mortgage as well if they can’t come up with that money in a different way.

Work with a Trusted Home Insurance Company

No one wants to think about what happens to their mortgage when they get divorced. Unfortunately, it happens.

Some of the options for what you can do when this happens are listed above. Remember, though, that you also need to deal with your home insurance and removing a spouse’s name from it if you had a joint home insurance plan when you were married.

That’s why it’s important to work with a trusted home insurance company such as Signature Insurance. Our trusted specialists can walk you through all your home insurance options if you’re getting divorced.

While divorces can be messy at times, we help our customers through the difficult times by making our home insurance plans easy. Contact us today to find out more and to get a free quote.