Harless Tax Blog

Harless Tax Blog

Mortgage and Divorce: Navigating Financial Independence

Friday, March 08, 2019

Source from redfin.com | If you look at the data provided by the Centers for Disease Control and Prevention for 2016, you can easily see that nearly half of all married couples end up getting a divorce. According to this information, 6.9 people per 1000 total population got married, while 3.2 people per 1000 total population got divorced. If you are getting a divorce and have a shared mortgage, you certainly aren’t alone.

Happily ever after may seem harder to achieve these days, but it is possible with some planning and cooperation. Learning everything you can about your options when faced with legal separation, divorce, mortgage, and co-owned home alleviates the stress attached to this type of experience while also providing valuable strategies to preserve the peace. Just remember that you had choices before you tied the knot, and you still have legal choices now. Whether you have a current mortgage in Portland or Atlanta, here’s a look at what you need to know.

What are your options if you are going through a divorce but have a co-owned home and mortgage?

Your options actually depend on several factors, including:

  • The title on the property.
  • Current financing on the home.
  • If anyone wishes to keep the home.
  • Each spouse’s ability to refinance the mortgage, which often involves credit scores and earning capacity.

Option 1: Removing spouse from mortgage by refinancing

Refinancing your mortgage is one of the easiest ways to settle the question of who gets the home. It places financial responsibility of owning the home squarely on the shoulders of the spouse who retains possession while allowing the remaining spouse to recoup the existing financial investment in the property. Several pros and cons are attached to this strategy, including:

Advantages
  • Changes the title into the name of one spouse only.
  • Only the spouse retaining possession is responsible for the monthly mortgage payments.
  • Allows one spouse to buy out the other spouse’s share in the property.
  • Both spouses can get on with their new lives because there’s no need to wait for a buyer.
  • The remainder of the divorce proceedings should be amicable now that both spouses are getting value from the marriage home.
  • The interest rate on the refinanced mortgage may be lower than the original percentage.
  • Alimony and/or spousal support qualify toward the income requirement for the loan as long as legal documentation validates the amounts and the length of time during which they are to be provided.
Disadvantages
  • Only your income is counted for your mortgage application. As a result, the refinance loan may not be approved.
  • You may not have built up enough equity in the home to refinance with a standard loan, making it more likely that you will need to obtain special financing.
  • Obtaining approval for a divorce loan to refinance the marital home is often contingent on the individual’s credit score, which may have fallen during the marriage. As a result, approval may not be given. You may not have enough time to raise your credit score, even with a rapid credit rescore.
  • The interest rate may be higher than the one on the existing mortgage.
  • The mortgage payment may be larger due to having to borrow additional funds to compensate the other spouse.
  • The mortgage term may be longer due to any number of reasons, including a higher loan amount or insufficient funds to take a shorter term.
  • You may need to ask a responsible adult, such as a parent or sibling, to co-sign your divorce loan in order to qualify. The co-signer becomes legally responsible for the mortgage if you default, making it more difficult for some divorced individuals to obtain a divorce loan.

The lender for the original mortgage must agree to your decision to refinance the loan in order to delete one of the spouse’s name. It is best to get this agreement in writing for your personal records. Your spouse must also agree to the new financial arrangement as well as to the change in the name on the title. Changing the title of the property to your name is a simple process that typically involves the use of a quitclaim deed. This type of deed is used when the property isn’t actually being sold, and it does successfully change the name on the title.

Before you jump in and apply for a mortgage, it’s important to explore your options using a mortgage calculator. Experiment with different terms to help guide you in making a choice in interest rates, term lengths, and mortgage points.

Option 2: Sell the home and split the profits
Finding a solution for what to do with a co-owned home and mortgage can be stressful, particularly when you and your spouse cannot agree. In some cases, selling the marital home and searching for new homes individually works in favor of both spouses. Here is a look at the pros and cons attached to selling the home and dividing up the profits:

Advantages
  • Provides a solution when both spouses want the home.
  • Opens up funds to pay off marital debt.
  • Avoids the need to refinance and acquire more debt.
  • Offers a fresh start for both spouses.
  • Makes it easier for both spouses to obtain new loans or credit.
Disadvantages
  • One or both of the spouses must continue to make monthly mortgage payments until the property goes through settlement.
  • Settlement costs can eat into the profit of selling your home. Typical costs include taxes, real estate agent fees, and title insurance.
  • Fighting may continue if one spouse wants the home but cannot afford a divorce loan.
  • Both spouses need to find a new place to live.
  • Both spouses may need to find temporary storage solutions for personal belongings.
  • It is possible that both spouses may need to pay capital gains taxes on the sale of the property if it exceeds the legal limit.
  • If the current housing market is sluggish, you may not get a good price for the sale of your home. As a result, you may not recoup your initial investment in the property.

Option 3: Rent the home
It is possible that you may need to consider renting the home if:

  • Neither spouse can afford to refinance the home.
  • Neither spouse wants to refinance the home.
  • A buyer does not step forward to purchase the home.

If one or more of these conditions apply, renting your existing home short-term or long-term is always a possibility. As with each of the options in dealing with the marital home, a few pros and cons exist, including:

Advantages
  • As long as the mortgage payments are made on time, the credit scores of both spouses are protected.
  • The financial value of the home is maintained.
Disadvantages
  • Both spouses are responsible for the remaining balance of the original mortgage.
  • Someone needs to handle the rental income, maintenance on the property, and tenant issues.
  • Credit scores may drop if the mortgage payments aren’t paid on time and in full.

Each of the above issues should be clearly detailed in the divorce agreement to avoid unnecessary problems. It is also important to include what consequences may arise if the responsible party doesn’t follow through with intended actions, such as making mortgage or property tax payments.

Tips for Applying for a New Mortgage as a Single Income

Refinancing the marital home comes with its own list of issues, not the least of which is making sure you qualify at the time you submit your application. Under normal circumstances, this should not be an issue. However, applying for a new mortgage with only one income is trickier than doing so when a dual income is involved. Here are a few tips to help you streamline the refinance process while ensuring the likelihood of a successful conclusion to your application.

Get your taxes in order
No matter which lender you decide to use, you are going to need your tax forms from the last two or three years. Providing these forms is one of the ways that you can establish your ability to afford a monthly mortgage payment. Not only are one of the most widely accepted forms of documentation to prove your financial stability, but they are also proof of your earning ability and creditworthiness.

However, tax forms may be difficult to obtain if you aren’t the spouse who handled taxes. You may also need to provide additional documentation if you took off significant time from employment, such as maternity or family leave, and your income decreased as a result.

Obtain your divorce decree
Before you submit your application for a new mortgage, you should obtain a copy of your divorce decree. Not only does this document provide proof that you are now legally divorced, but it also shows what your financial responsibilities are regarding your ex-spouse and children.

Child support documentation if needed
If you either pay or receive child support, it is important to obtain copies of the agreement before you apply for a mortgage loan. This documentation is used to assist the lender in determining how much you can reasonably afford to borrow.

Working through your divorce with your spouse benefits everyone involved. In many instances, the marital home has the greatest financial significance during the divorce. Figuring out what you need to know to successfully negotiate a peaceful solution for the dispersal of this asset is an important step in keeping your sanity during this process.

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