November 23rd, 2022
In many cases, a married couple will take out a mortgage to purchase the family home. In the event of divorce, any mortgage taken out during the course of the marriage will be treated as marital property and must be divided between the parties. If neither spouse can afford the cost of keeping the home after the divorce is finalized, selling it might be the only option. But if one spouse wishes to keep the house and assume responsibility for the loan, the mortgage may need to be refinanced into one name if the other spouse’s name can not be removed from the original mortgage.
Why Would You Refinance a Mortgage During Divorce?
Whichever spouse gets the house in a divorce action will typically also get the debt that follows it. When a couple has a joint mortgage, they may refinance it into one name after divorce to remove the spouse who will no longer be on the loan from being responsible for the mortgage payments. While refinancing can allow a spouse to buy out the other’s interest in the property, it can also protect the other spouse’s credit if the spouse who keeps the home fails to make payment on the mortgage.
Importantly, mortgage companies are not bound by court orders or divorce judgments. A lender may pursue repayment from either or both parties on the loan, regardless of whether they are married or divorced. In addition to removing a party from the mortgage, you will still have to remove them from the title of the property — this can be done by filing a quitclaim deed or a Summary Real Estate Disposition Judgment.
Other Options for Dealing with a Mortgage in Divorce
In some cases, there may not be enough equity to refinance the home — or your debt-to-income ratio may be too high for the purposes of refinancing. Depending upon your specific situation, you might need to consider options other than refinancing after divorce. It’s best to try to reach an agreement outside of court with your spouse that meets your needs. When looking at both people's goals for the home it is helpful to think about options.
Alternatives you might consider instead of refinancing the mortgage can include the following:
- Qualified Name Delete Assumption - Some mortgage companies will allow one person’s name to be removed from the mortgage, thereby keeping all the original terms of the mortgage as long as the person assuming the mortgage shows they can qualify for the terms on their own income. And no money can be taken out to increase the mortgage balance if the person keeping the house owes equity to the other spouse. That might be able to be handled through a home equity line of credit as a separate transaction after the assumption is completed. There is often a fee for doing this and banks are reluctant to guarantee qualification before the divorce is final. But this is an option worth looking into.
- Selling the marital home — Each spouse can take their share and put it toward a new home.
- Keep the home and mortgage — If you aren’t able to refinance the home and selling it is not an option, both parties can remain on the mortgage and be liable for payment. However, this can be financially risky and impact a party’s ability to buy a new home in the future. Lawyers can include language making one spouse responsible and indemnifying the other spouse, but both people need to understand the risks and benefits of doing so.
- Negotiate a longer time period to refinance — While many divorce settlements include a provision requiring a mortgage to be refinanced within 60-90 days of the divorce, you may be able to negotiate a longer time frame to get your finances organized and include language with some protections for that period.
Regardless of the option that you and your former spouse settle upon, it’s crucial to ensure you take all necessary measures to protect your credit rating. Your credit score can significantly affect your ability to secure a new mortgage in the future.
Re-establishing Your Credit After a Divorce
Your credit score can play a big role in whether you qualify to refinance your mortgage or obtain a new one after divorce. Although a change in marital status will not impact your credit score directly, the divorce process can have indirect effects on it. For example, joint credit obligations can remain on your credit report even after your marriage has ended — changes in your financial situation after divorce may also hurt your credit score. Closing credit cards just prior to refinancing can surprisingly have a negative impact on one’s credit. It’s important to monitor your credit score so you know what appears on the report and a mortgage professional well versed in divorce and mortgages can be a great resource.
To protect your credit score during divorce, it’s best to work together with your soon-to-be former spouse to pay off existing debt and decide which accounts to close so that you benefit your credit score. If it isn’t possible to close an account, you may be able to convert it into an individual account. Once you have closed joint accounts, you may need to start building your own credit by taking out a low-limit credit card and increasing the limit gradually. After several months, you may be able to apply for another card. As long as you continue to pay your bills, you will be able to reestablish your credit in no time.
Contact an Experienced Minnesota Divorce Attorney
Divorce isn’t only emotionally overwhelming — it can also be financially complex. It’s essential to have a knowledgeable divorce attorney by your side every step of the way to guide you through the legal process. Family law attorney Louise Livesay has been dedicated to helping clients who are facing divorce and a wide variety of family law issues in the Twin Cities area for over two decades. We welcome you to contact us online for a consultation or by calling 651-294-2338.