Going your separate ways when a marriage ends involves a lot of big financial decisions – including what to do with the marital home. Some couples choose to sell and split the proceeds, but if one of you wants to keep the house, you’ll likely need to refinance the mortgage after the divorce.
As stressful as it might be, know that you’re not alone. With nearly 680,000 divorces occuring in the U.S. each year, many formerly married partners find themselves in this thorny predicament. Depending on the type of mortgage and title associated with the home, a refinance after divorce can be tricky – but there are reasons why you still may want to choose this option.
Key Takeaways:
- Refinancing after divorce allows a separating couple to remove the former spouse who isn’t keeping the home from the mortgage and title, freeing both parties from shared liability and enabling the removed spouse to purchase another home.
- The spouse keeping the home must qualify for a mortgage refinance independently – proving sufficient income, a solid credit score and enough home equity.
- If you don’t qualify for a refinance on your own, you do have other options, including mortgage assumption, selling the home, loan modification or remaining co-borrowers temporarily while you improve your finances.
Do You Have To Refinance Your House After A Divorce?
No – many divorcing couples decide to sell the home if they can’t afford the mortgage payments after the divorce agreement. If either you or your ex-spouse wants to keep the house, however, a refinance might be the way to go. Refinancing replaces the existing loan with a new one at current interest rates and new loan terms, and it allows for the removal of a borrower’s name from the loan.
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4 Reasons To Refinance After Divorce
Here are some of the top reasons to consider this strategy.
1. To Remove An Ex-Spouse From The Mortgage
If the mortgage was taken out in both spouses’ names, you both still share an equal interest in the property – and equal financial liability – post-divorce. Refinancing can allow you to remove your former spouse’s name from the home loan and the title, but you must be able to qualify for the new loan based solely on your income and credit profile.
Another way you may be able to achieve this is by asking your lender for a release of liability, which removes your ex-spouse’s financial obligation to repay the loan if you default. That also gives them an opportunity to purchase a new house post-divorce without the outstanding mortgage debt on their credit report.
2. To Remove Your Name From The Mortgage
If you’re not keeping the home but your former spouse is, a refinance releases you from financial obligation and protects your own credit score. As long as your name is still on the mortgage, you’ll be responsible for making the monthly payment, even if you’re not living there.
By going through the refinance process, you’ll be able to remove that liability. If your ex then misses payments in the future or the home winds up in foreclosure, your credit won’t be impacted.
3. To Change The Mortgage Terms
Refinancing after a divorce can help you get a mortgage with more favorable loan terms. For instance, you may want to take advantage of current mortgage rates that are lower than the one you currently have, shorten the repayment period to pay off the mortgage sooner or extend your repayment period to make your mortgage payments more affordable.
You can also use a refinance to change the type of mortgage you have. For example, if you currently have an adjustable-rate mortgage (ARM) but would like to have a fixed-rate loan for better stability, you can use a rate-and-term refinance to replace your existing loan.
4. To Access Your Home Equity
You can also do a cash-out refinance to access the equity in your home. Your equity is essentially the difference between your current mortgage balance and what your home is worth. By refinancing your existing loan, you can convert some of your equity into cash to use for a number of things.
For example, you could use some of the extra cash to buy out your former spouse’s share of the house (or vice versa, if they’re keeping it). Or you could use some of the equity yourself to pay down high-interest debt or fund a home improvement project.
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Considerations For Refinancing Your Home After Divorce
Before you start the process of refinancing, you and your ex should consider a few factors first. For starters, you need to decide who will continue to live in the property and who will be removed from the mortgage.
Then, consider whose name is on the home’s title – that indicates who has ownership rights over that property. You can use a quitclaim deed or warranty deed to transfer ownership; either way, this step can’t be skipped or you risk ownership disputes later on.
Remember though, that even if the home’s title is transferred to one ex-spouse, if both of your names remain on the mortgage, you’re both responsible for the debt. If the spouse keeping the home subsequently misses payments, both of your credit scores could take a hit, and the lender can take both of you to court if the loan goes into default. That’s why it’s imperative that if one person is keeping the home, the title is transferred solely to them and the mortgage is refinanced in their name only.
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How To Refinance Your House After Divorce
The process of applying for a refinance is fairly straightforward. You (or your ex, if they’re the one keeping the house) should start by filling out an application and getting preapproved by a lender. During the underwriting stage, the lender will vet your finances, including your employment, income, credit score, debt-to-income (DTI) ratio and all assets and liabilities. You’ll also pay refinance closing costs, usually 3% – 6% of the loan amount.
Refinancing after a divorce, however, can add some unique underwriting wrinkles. For instance, if you have to pay child support or alimony (also known as spousal support) to your former spouse, the lender will view these payments as a debt obligation. Likewise, any income you’re receiving in the form of spousal support or marital assets must meet the lender’s requirements if you plan to use these funds to pay the mortgage.
Your lender may require that you receive documented alimony or child-support payments for 6 months before and 36 months after the loan’s closing for it to be considered income, according to the Divorce Lending Association. Once your lender approves you for the refinance, the property will be appraised to determine its current value and how much equity you have. From there, you’ll close on your new loan.
Refinancing Requirements After Divorce
To qualify for a new loan as a single borrower, you’ll need to meet all borrowing requirements on your own income and credit.
Credit Score
Your credit score is a key factor in your ability to refinance. Most conventional and VA lenders require 620 or higher as a minimum score; FHA requires 580 for most loans, and USDA lenders require 640 (for eligible rural properties).
If your credit score took a hit during your divorce, you may need to spend a few months boosting it before applying for a refi. Pay down credit card balances, make on-time payments, dispute any errors and avoid opening (or closing) credit lines to rebuild your credit.
Employment And Income
Lenders want to see that you’ll be able to repay the refinanced loan on your own. They’ll check for a stable employment history and income over the last 2 years, so be prepared to provide pay stubs, federal tax returns and business documents (if you’re self-employed) as required documentation.
Debt-to-Income Ratio
This calculation determines how much of your gross monthly income goes toward paying both your mortgage and overall monthly debt as a percentage of your income. Most lenders typically prefer a DTI ratio of 43% or lower, but some loan programs go as high as 50%. VA and USDA loans limit DTI to 41%.
Here’s where divorce-related settlements come into play. If you’re paying child or spousal support, lenders will count these as debt obligations, which increases your DTI. And if you receive these payments from your former partner, it will count as income only if you’ve received consistent payments for the past 6 months and your divorce decree orders payments to continue for at least 36 months after closing.
Home Equity
In most cases, you need at least 20% equity to refinance without paying private mortgage insurance, though this varies by lender and loan program. For example, say your home is worth $300,000 and the current loan still has a balance of $200,000: You’re left with $100,000 of equity, or 33%. One thing to keep in mind here: Your lender will order a refinance appraisal to determine the home’s current value, which might be significantly higher than when you first purchased the home, increasing your equity.
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Alternatives To Mortgage Refinancing Following A Divorce
In some cases, refinancing may not be possible, for financial or other reasons. What happens then? Here are some alternatives to consider.
Mortgage Assumption
A mortgage assumption allows you to take over the mortgage payments and release your former spouse from any financial liability. Of course, your lender has to sign off on this first, and will check your credit score, DTI and income, but you’ll avoid the costs and hassle of a refinance. You must also be current on your mortgage payments to qualify for this option.
Sell The Property
Sometimes, selling the house is the easiest option. Both parties can split the proceeds of the sale and walk away free and clear to start fresh. You can use your share to purchase another home, or rent for a while until you can buy again.
Co-Own The Home
If you can’t afford to refinance, or if both you and your ex-spouse want to keep the marital home, you could choose to co-own the house. While this option is less common and carries risk if you’re not on good terms, some former couples do keep the home while both covering their share of the mortgage payment. If you choose this option, consider making the terms official in your divorce decree, or signing a separate contract.
Wait To Refinance
Another option is to hold off on refinancing and pursue other avenues for removing the other spouse from the mortgage and title in the meantime. Waiting to refinance does come with risks, however: Interest rates could rise, or your home value could decrease.
FAQ
The Bottom Line: Refinancing After Divorce Can Give Everyone A Clean Break
Refinancing the family home after a divorce isn’t always easy, but it can be a good way to remove your former spouse from the mortgage and give everyone peace of mind – and a fresh start.
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Ben Shapiro
Ben Shapiro is an award-winning financial analyst with nearly a decade of experience working in corporate finance in big banks, small-to-medium-size businesses, and mortgage finance. His expertise includes strategic application of macroeconomic analysis, financial data analysis, financial forecasting and strategic scenario planning. For the past four years, he has focused on the mortgage industry, applying economics to forecasting and strategic decision-making at Quicken Loans. Ben earned a bachelor’s degree in business with a minor in economics from California State University, Northridge, graduating cum laude and with honors. He also served as an officer in an allied military for five years, responsible for the welfare of 300 soldiers and eight direct reports before age 25.
