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Mortgage Options For Divorce And Separation
Nobody walks into a marriage looking forward to a divorce.
But sometimes things just don’t work out the way you envisioned during the good times.
Staying married has not only stopped adding value to your life, it has removed value!
Whether you are separating towards divorce, settling the final details of a divorce, or already divorced, the house is often one of the main concerns with how assets should be split.
And the underlying reason for that is the mortgage attached to the house.
Here are some of the common tested options of managing this problems of the home loan.
1) Refinance with one name
The most straight forward solution of this issue is to refinance the current mortgage which contains two co-borrowers (husband and wife) to a new loan with only one borrower.
This effectively transfers the debt obligation to only one party.
If the house is currently in both names, the best scenario is that the single borrower would be the sole owner of the house resulting from the asset allocation from the divorce.
Saying that, it is not impossible that this single borrower would have his or her name removed from the title.
This means that in such unique cases, this person would no longer be an owner, but solely a borrower.
However, another challenge with refinancing to a single name with a view of a buyout is whether a lender would approve it.
Especially with dual income families, the initial approval of the existing mortgage might have been made possible with the combined income of both parties, aggregate credit score of both, and combined personal debt levels, etc.
When one party has been removed from the equation, it might be next to impossible to obtain a new loan to replace the current one.
While lenders give divorce cases special treatment and attention, they have credit protocols that might simply deny a home loan as the numbers just don’t add up.
You might face less resistance if you are the sole breadwinner and the house would be solely under your name. And don’t forget that alimony can be considered as a part of personal income.
Also take note that should there be a change of ownership from two person to one, the current lender might find this a reason to justify accelerating the loan.
This is why one must tread carefully in divorce finances.
Further more, if the house had depreciated in value since your purchase, there might not be enough equity in it for a loan to be approved.
In view of these challenges, it is no wonder the next solution often makes the most sense.
2) Assume the mortgage
If the ownership of the property is transferred to you, then the option assuming the mortgage after divorce might be something the lender would gladly entertain.
The key criteria would be whether your income would enable you to comfortably repay the monthly payments on a timely basis.
It might be an easy decision for the lender when there is considerable home equity in the house.
Qualification might not be a big problem as long as there is strong personal income and good credit.
3) Sell the house to repay the mortgage
When there are so many legal and financial obstacles to navigate, the easiest solution might be to sell the house and fully repay the outstanding home loan.
This gives you a clean split with your (former) spouse and frees you up to buy your own home with your own money.
But there are also some critical factors to consider going this route.
Firstly, with your single income, you might not be able to afford a house as big as the current one.
Then there is also the prospects of actually losing money on a sale. Keep in mind that investors love to look for desperate sellers in this particular predicament so that they could buy at a low price.
And we haven’t even talked about the possibility of needing to keep the house for family reasons such as for the well-being of the kids.
4) Loan programs for divorces
There are some mortgage programs that were created to cater to homeowners who find themselves in such predicaments.
Some are meant to help one take over a mortgage after divorce or separation.
You should definitely take a look at them.
- FHA streamline refinance
- VA streamline refinance
- Home affordable refinance program (HARP)
When in doubt, do call up the relevant agencies to inquire about your eligibility and how these programs work.
5) Retain the house and mortgage as they are
When it makes absolutely no sense to sell and lenders are running away from you as soon as they hear the word refinance, then the best options might be to keep the house and joint mortgage, and allow things to stay as they were.
Both partners will then continue to be liable for the mortgage debt.
If you are a shark at the negotiating table, you might even have your ex expressly state in the divorce agreement that he or she will be the person making the mortgage payments.
However, you probably don’t need any reminding that words and action are two different things.
Because your name is still listed as a borrower in the loan agreement, if your former spouse fails to make the required payments, your credit score would suffer as well.
And that is just the start. You might even face foreclosure if the payments continue to be missed.
This is why shared mortgages are tricky affairs that needs to be carefully contemplated. Especially between former husband and wife.
This leads us to the next important point.
The problems created with bad credit can potentially make life hell for you.
This is why other than the thought of losing the house, the idea of having your credit ravaged by someone else should be a cause for concern.
Unfavorable credit scores can mean higher interest rates for loans, outright rejections for credit facilities, raise eyebrows of landlords and employers, and even higher insurance premiums, etc.
These can have both short term and long term repercussions.
This is because even if efforts have been made to recover your credit reputation, it takes time for your score to rise again.
And in the meantime, you are pretty much screwed.
Sometimes, presenting the divorce decree can help you buy some time with a lender. But do realize that it is up to them whether to allow any leeway.
Trying to refinance after a divorce with bad credit can be a huge challenge.
To protect yourself from a spouse who fails to pay, and destroys your credit in the process, you might request that your divorce lawyer include certain terms in the divorce papers.
Terms might be those such as he or she will seek to refinance the loan under his or her own name, and should be done by a certain period of time. Failing which, the property must by put on sale.
Finally, the best solution to settle things amicably when there is a divorce is ultimately to sell the house. It’s the cleanest break-up and leave you with marital assets from the proceeds to split.
But that is not always possible due to the various reasons stated previously.
So do keep the various factors in mind when deciding what to do with the mortgage.
After which, you have to move to the next issue which can be just as stressful… which is who would own the house in name.