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Refinancing After Divorce: What You Should Know
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If you and your spouse are going through a divorce and need to decide how to split your home property, refinancing after divorce may be an option if you want to stay in the home after your marriage. This guide explains whether you should refinance after divorce, how to remove a spouse from a mortgage and options if you can’t refinance after divorce.
4 reasons to refinance after divorce
Refinancing after divorce can accomplish various objectives and be in both spouses’ best interests. Here are the most common reasons to refinance after divorce.
1. Remove a spouse from the mortgage
To remove a spouse from the mortgage, it’s usually necessary for the spouse remaining in the home to refinance to a new loan in their name only.
And as long as both names are on the home loan, both parties continue to be financially responsible for the mortgage in the lender’s eyes. If the spouse who remains in the house fails to pay the loan and it goes into foreclosure, the other spouse is still a co-borrower and is equally liable.
2. Buy out a spouse
Refinancing the home is one way to approach a divorce house buyout. If you’re trying to get equity out of the home to pay out the other spouse’s share of the house, a cash-out refinance can be the best course of action, says divorce mortgage consultant Todd Huettner. This can often be more advantageous than unplugging retirement funds or tapping into other assets.
3. Access home equity
Refinancing after divorce can provide access to home equity for reasons other than buying out a spouse. For example, the spouse remaining in the home may refinance to supplement income, pay for home improvements, pay down other debt or fund a large purchase.
4. To change mortgage terms
If interest rates are lower than when the couple first got the mortgage, refinancing after divorce can lower the payment. Or the spouse may wish to extend the mortgage length or other terms to make the loan more affordable or stable.
Pros and cons of refinancing after divorce
While refinancing after divorce is usually necessary to remove a spouse from a mortgage, borrowers should know the benefits and drawbacks.
Protects both spouses. As long as the home loan is in both parties’ names, late or missed payments or foreclosure will impact both spouses. Additionally, the spouse who no longer lives in the home could have difficulty qualifying for a new mortgage or other credit as long as they are still on the old loan. Refinancing protects the spouse no longer living in the home and provides privacy for the spouse keeping the home.
Can buy out a spouse and keep the home. While many divorcing couples sell the house to split the equity, a cash-out refinance allows the couple to split the equity while one spouse holds on to the property.
Can make the mortgage payments more affordable. Refinancing can potentially lower the payment or change loan terms.
It will be harder to qualify. Qualifying for a refinance may be more challenging for one spouse. Their income, credit history and other financial details must satisfy the loan requirements.
You’ll pay closing costs. Borrowers pay 2% to 6% of the home loan amount in closing costs. The expense could add stress to an already emotional situation.
Your payment could increase. If interest rates have risen or the spouse does not qualify for competitive loan terms, the payment could be higher after the refinance.
What happens if I can’t refinance after divorce?
Refinancing after divorce can present some challenges compared to getting a mortgage as a married couple. As the sole borrower on the new loan, your income, credit history and other financial information have to meet the lender’s loan requirements. If your income alone cannot support the loan amount or other aspects of your situation do not satisfy the lender’s eligibility requirements, you may not be able to qualify for a refinance.
Additionally, the transaction will need to meet the lender’s loan-to-value (LTV) ratio requirements. If your home is underwater or there isn’t enough equity to meet the LTV ratio requirements, you won’t qualify for a refinance after divorce.
Alternatives to refinancing after divorce
In cases where refinancing after divorce isn’t possible, homeowners have a few options.
→ Sell the home. “The simplest and easiest [option is to] sell the house,” Huettner says. While this can be emotionally taxing and can have a long-term financial impact, selling the home and purchasing a less expensive home or waiting to buy again is an alternative to refinancing after divorce.
→ Find out the reason for not qualifying. If your refinance loan was denied, work with your lender to understand why. Huettner says borrowers can be eligible for a refinance after a denial by understanding the lender’s requirements and addressing the necessary aspects of their situation. For example, if your debt-to-income (DTI) ratio income is the issue, Huettner suggests paying down your non-mortgage debt (using borrowed funds or leveraging other assets if necessary). He also says borrowers should make sure the lender calculates their income correctly, as this is a common reason borrowers fail to qualify. Additionally, Huettner said a divorcing couple could restructure the spousal support to increase qualifying income for the spouse refinancing.
→ Wait to refinance. Delaying the refinance can allow time for the home value to increase, your mortgage balance to decrease or your credit score to improve. However, waiting to refinance after divorce comes with many risks, Huettner warns. Interest rates could increase, home values could decrease, and as long as both spouses remain on the loan, late or missed payments will impact both spouses.
Can you take a name off a mortgage without refinancing?
Refinancing after divorce is the primary way to remove a spouse’s name from a mortgage, but some borrowers may have an option of a loan assumption.
With a loan assumption, also called a mortgage transfer or mortgage reassignment, a lender allows the spouse who will remain in the home to take over the loan, based on the divorce decree, retitling of the house and their ability to handle the mortgage. The lender then issues a release of liability for the other spouse. “Most loans don’t allow an assumption,” says Huettner, but it’s case-dependent and worth asking your lender if that’s an option.
Frequently asked questions
Does taking one spouse’s name off the house deed automatically remove them from the mortgage?
No, taking one borrower’s name off the house deed — called retitling the house — does not change the joint responsibility for the mortgage. Removing a spouse from the loan is a separate process that usually involves refinancing during divorce or refinancing after divorce.
How do I get my name off a mortgage? Is refinancing the only way?
In most cases, you’ll need to refinance the loan to a new mortgage in one spouse’s name only. However, some lenders may allow other options, such as a loan assumption.
How do I qualify for a divorce mortgage?
There is no official “divorce mortgage.” Buying a house after divorce or refinancing after divorce is the same as purchasing or refinancing a home with a spouse. You’ll need to meet the specific mortgage requirements for the loan you’re applying for. However, since you’ll be the only borrower, the lender will only consider your credit history, income and other financial information.
How much are divorce refinance closing costs?
Refinance closing costs typically run between 2% to 6% of the loan amount. However, this can vary depending on the type of loan. Some lenders offer no-closing-cost refinance loans which either roll the closing costs into the principal amount or have a higher interest rate.
Is refinancing during divorce more beneficial than refinancing after divorce?
Refinancing before a divorce is final can speed up the timeline and limit the impact of rising interest rates. However, refinancing after divorce can ensure that all divorce settlement details are final. Consult your attorney and financial professional to determine what is best in your situation.