Divorce and Your Mortgage: What You Need to Know

Blog posted On April 30, 2020

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When you get divorced, one of the biggest assets typically at stake is your marital home.  If you and your spouse bought your home together and paid the mortgage together, you’re going to need to decide what to do with your joint investment.  Sometimes, both spouses agree to sell the home.  Other times, one spouse will continue living in the home and the other will move out.  The first choice you and your former spouse will need to make are whether to sell the home or keep the home, then you can decide what to do about your mortgage.

Selling Your Home

In many cases, it makes sense to sell the marital home.  It may be difficult for either of you to afford the mortgage payment on a single income, it may be easier to maintain a smaller home, or you could just want a change of scenery.  When you decide to sell your home, you’ll need to agree on an asking price and how to split any profit.  You’ll also need to agree on how to pay the mortgage until you sell your home.  Will one spouse continue to live in the home and pay the mortgage until you sell?  Are you both moving out and planning to split the mortgage until you sell?  Avoid any future arguments by planning ahead for all possible scenarios, including not selling right away.

If your home has appreciated significantly since you bought it and you expect to owe a capital gains tax, that may impact how you file your taxes.  For single taxpayers filing separately, you can exclude the first $250,000 in capital gains if the home was your primary residence and you owned it for more than two years.  For married taxpayers filing jointly, you can exclude up to $500,000.  Estimating your profit may impact how you choose to file your taxes to reduce both of your tax bills.

Staying in Your Home

You may want to stay in your home if your children are still in school, you can comfortably afford the mortgage payments, or you do not wish to move and your spouse is willing to move.  When you choose to stay in your home, you will most likely need to refinance the home loan to take your spouse’s name off the loan.  Before you refinance, you will need to buy your spouse out of the equity they put into the home.  For example, if you have $60,000 worth of equity in your home, you’ve agreed to a 50-50 split, you’ll have to pay your spouse $30,000.  Once you’ve bought your spouse out of their home equity, you can refinance in just your name.

In some cases, you may not qualify for a refinance on your own.  Your single income, your individual debt-to-income ratio, or your credit score may not meet the refinance requirements.  If you’re expecting alimony and child support payments from your former spouse, you can count that toward your income if your divorce agreement states you will be receiving payment for at least three years and your former spouse has paid these payments on time for at least six months.  Keep in mind, a refinance is a new loan origination so you will have to pay closing costs.  With mortgage rates historically low, you may qualify for a lower interest rate and lower your monthly payment, giving yourself more disposable income. 

If you are unable to qualify for the refinance on your own, but you are expecting a large sum of cash either through a tax refund, inheritance, alimony, or other source, you may be able to recast the mortgage by making a one-time principal payment.  When you recast your mortgage, the lender will amortize the loan to include the large lump-sum payment you make.  While a refinance is a new loan origination, a recast will keep the same loan term, but lower the monthly payment.  The lower monthly payment may make it easier for you to stay in your home on a single income. 

When you’re getting divorced and a home is at stake, it’s important to get your plan down in writing and come to a legal agreement.  Losing your home through foreclosure can be financially devastating and make it difficult to buy another home.  If you have any questions about divorce and your mortgage, let us know.