Mortgage and Divorce: What Happens to the House?
No one plans to get divorced or separated. It’s not what a couple hopes for when they say their vows. And it’s definitely not what they envision when opening joint bank accounts, purchasing a car, getting a dog, or buying a house together.
But if a pair does end up divorcing, figuring out what will happen to joint assets like these can be confusing and painful—at a time that’s already an emotional rollercoaster.
Taking out a mortgage is the single biggest financial commitment that most married couples make. Collectively, Americans owe $9.1 trillion on their mortgages, which make up by far the largest share of consumer debt.
While spouses probably don’t expect to split up when they make this joint investment, the reality is that an estimated 39% of marriages may end in a breakup. Considering that nearly 65% of Americans own homes, it’s possible that a couple facing divorce will have to figure out how to deal with a mortgage once they’re no longer together.
So what happens to your home and mortgage when you get divorced? The answer can vary depending on what state you live in, your personal preferences – for instance if one spouse or the other plans to stay and occupy the house, and other factors. Here are some answers to your divorce and mortgage questions:
Why the State You Live in Matters
If you and your spouse can come to an agreement on your own, you can distribute the house debt during divorce however you like. Ultimately, a judge signs off on the divorce. If you can’t decide on your own, a judge may order you to divide assets and debts based on one of two legal frameworks. According to the IRS, 41 states in the country operate on a system of “common law,” which treats each spouse as an individual with his or her own assets or debts.
If you live in a common law state, you typically are considered an owner of a home only if your name is on the deed, and you are usually responsible for a mortgage only if your name is listed as a borrower. by way of definition, a mortgage is a security interest given to a lender as collateral for a loan, whereas title evidences one’s ownership of a property by means of an instrument called a Deed.
You cannot give a mortgage unless you are on the title. In these states, a judge divides assets and debts based on “equitable distribution,” meaning in a way that he or she considers fair, but not necessarily 50/50. In some cases, the judge may order one party to use separate property to make the settlement fair to both spouses.
There are nine “community property” states that do things a bit differently: Arizona, California, Idaho, Louisiana, New Mexico, Nevada, Texas, Washington, and Wisconsin (Alaska also has an optional community property system). The commonwealth of Puerto Rico allows property to be vested as community property, as does several Native American jurisdictions.
Community Property is defined as any asset or any debt acquired during the course of a marriage. Exceptions to this rule can consist of things brought into the marriage separately such as anything inherited by either party, or any gifts received by either party.
In these states, any home bought during the marriage is considered jointly owned by both spouses, regardless of whose name is on the deed or who paid for it (may be subject to reimbursement for one spouses “separate property” contributions).
The exception is if the property was bought before marriage, or if it was inherited or received by only one of the spouses during the marriage. In these states, community property and community debt is usually divided equally. Assets like Pension plans and the like can also be categorized as community property.
It is important to know that community property law also applies to a couple’s domicile, which may not be where the couple currently lives. A domicile is a person’s legal permanent address. For couples who have homes in multiple states, who have moved frequently, or who are in the military, establishing a proper domicile is important in order to determine how assets they will divide assets in the event of divorce.
Selling Your Home
If you and your spouse decide that selling your home is the right move, it may enable you to pay off the mortgage after the sale and divide any remaining profit. The plus side is that no one is stuck with mortgage, and you can both have a clean slate. But selling isn’t an option for everyone.
If the housing market is down, or the home is worth less than you owe on the mortgage, selling may not be the right fit for you. Putting the house on the market may also be a nonstarter if one spouse wants to stay in the home.
Keeping the House
First, it is good to decide if one spouse or the other is planning to stay in the home. In most cases, the departing spouse will need a place to live and may want to purchase a new property. If that spouse remains on the departing property mortgage note, the lender may still include the departing house payment in the DTI (debt to income ratio) calculation of the new mortgage.
If this happens the departing spouse may want the remaining spouse to refinance the home into their name only and take the departing spouse off the mortgage so it no longer shows up on their credit report as a debt.
Some lenders will allow a person to show 12 months of continuous payments as evidence that the other spouse is making the mortgage payment in order to exclude this debt from the DTI calculation of new home. It is also good to note that some mortgages may be assumable. Assumable mortgages are normally ARM and government type loans.
If you think your loan may be assumable, the retaining spouse can call the lender and ask for eligibility criteria to assume the existing mortgage. Some couples decide to hold onto the existing mortgage and keep both names on it. In this case, the divorce agreement usually spells out who will make the mortgage payments and when.
From the perspective of the lender, you’re both equally responsible for the mortgage loan, regardless of what the divorce decree states. If the remaining occupant becomes delinquent on the mortgage payments, it is likely to affect your credit rating.
If just one spouse is going to keep the house, the other partner will likely be asked to sign a quitclaim deed to transfer his or her interest in the property over to the other person.
But keep in mind that signing a quit claim deed doesn’t mean the person who signed off their interest is removed from the mortgage. Even if you don’t have any claim on the title of the property anymore, your name remains as a debtor on the mortgage.
Another scenario may be that the departing spouse wants to purchase a new home and can qualify with both the departing and new home mortgage payments. In this case, the lender will likely ask to review a court certified separation agreement, or if the divorce is final, the fully executed divorce decree, along with any standard loan qualifying documentation. Alimony, child support and other such items spelled out in these agreements will be considered in qualifying for any new loan.
How Refinancing Your Mortgage Can Help
If you want to avoid sharing a mortgage with a spouse once you’re done sharing everything else, you could consider refinancing your mortgage. Refinancing involves qualifying for a new mortgage, which comes with new terms, and using it to pay off your previous home loan.
When you refinance, just one spouse’s name can remain on the new loan, meaning he or she alone will be responsible for payments. Keep in mind that the person whose name stays on the loan will need to be eligible for refinancing on their own based on his or her income, credit score, employment history, and other factors.
If current interest rates are lower than your original mortgage, that can be another benefit to refinancing. Even reducing your interest rate by 0.5% on a jumbo mortgage may save some people money on their monthly mortgage payment depending upon things like loan costs and term. With SoFi, you can refinance with competitive rates and without paying any hidden fees.
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