Among the many decisions to be made during a divorce is what to do with the house. There are three main mortgage options for splitting partners: selling, refinancing, or buying the other person out.
Sell the House
If the parties intend to split the value of the house, one of the simplest ways to accomplish this is by selling the property and dividing the profit. Both borrowers need to remember that selling comes with costs, like real estate agent commission, investment to get the home in tiptop shape, closing costs, and possible capital gains taxes. You and your former partner will need to decide how to pay for these fees in an equitable manner.
Refinance Your Home
If the terms of the divorce agreement include one partner gaining full possession of the house, refinancing into a new home loan is a good way to remove one borrower from the responsibility of the mortgage. A new loan can be made in just one person’s name as long as that spouse can use only their own income and credit score to qualify. The good news is any alimony or child support the new borrower receives from his or her former spouse can be counted as income as long as the divorce terms call for those payments to be made for at least three years.
It is important to note that taking a spouse’s name off the mortgage loan does not automatically remove them from the property title. That means if you keep the home and then sell it down the road, your ex-spouse could still claim part ownership and demand a portion of the equity. To remove your spouse’s name from the title, you can file a quitclaim deed that transfers ownership from one person to another or you can request that your mortgage lender have the name removed during the refinancing process.
Buy Out the Ex- Spouse’s Share
In some cases, a divorce settlement will call for the home value to be split among the spouses, but one spouse wants to keep the house. This means that in order for the vacating spouse to be removed from the mortgage and title, the spouse staying in the home will need to buy out the leaving spouse’s equity. For example, if a couple had $200,000 in home equity and it needed to be split equally, the spouse keeping the house would need to pay the leaving spouse $100,000 in cash. If they do not have this money in their bank accounts, they could get a cash-out refinance loan. This allows borrowers to get a new mortgage loan that is larger than their current balance by pulling out some of their equity. So, if the couple above still owed $300,000 but their home was worth $500,000, the spouse keeping the house might get a cash-out refinance loan for $400,000 to pay the vacating spouse their share of the equity.
While the divorce is still being finalized, both spouses need to be vigilant about making sure the mortgage still gets paid on time. Late payments can hurt the credit of both parties, making it harder for them to take out loans in the future.
If you have any questions about mortgages or home financing, please give us a call today. We love to talk about home financing and the benefits of home ownership.