How divorce can impact your mortgage
Even in the midst of divorce, the mortgage that you and your divorcing spouse agreed to pay continues to be your joint responsibility. Couples who wish to sell their home because of a divorce may confront such obstacles as a slow housing market or strict lending requirements. Before the market crashed, it was easy for couples to sell their homes, divide the equity and buy other homes. However, in some cases, neither party is able to sell the house or refinance.
Some couples may owe more on their mortgage than the value of their home. The solution is to pay off the difference on the loan or engage in a short sale, in which the couple sells the home for an amount that is less than that which they owe on the mortgage. If both of you opt for a short sale, your credit scores will be affected. In addition, both of you may be required to pay the difference between the selling price of the home and the mortgage debt unless the bank agrees to free you from that responsibility during the short sale.
Alternatively, you could apply for a loan modification, in which changes are made to your current mortgage to make the payments more affordable. If you apply for a mortgage modification while your divorce is pending, the signature of both spouses will be required on the modification documents if both spouses signed the initial loan documents. Thus, both spouses will have to repay the loan.
It is more advantageous to apply for a loan modification after your divorce is final. In this scenario, you can apply independently, and your former spouse’s signature will not be needed on the modification documents. However, this is dependent on the terms of the final divorce decree, which may state that the spouse who is staying in the home must refinance the mortgage instead.
Another possibility is to refinance the mortgage under the name of one spouse. However, this arrangement is feasible only if the following conditions are present:
- The couple is not underwater on the mortgage and does not owe more on the mortgage than the home is worth.
- One spouse has adequate credit and income to be eligible for a refinance.
- The other spouse agrees to relinquish responsibility for the house.
However, it is frequently the case that neither spouse can afford to keep the house with only one income and neither can afford to refinance the mortgage. If you desire to keep the house, but do not wish to spend funds on a refinance, you may consider a loan assumption. Although they are uncommon, there are some lenders who may allow one spouse to assume the mortgage.
In the event that none of these options is appealing, then both spouses will have to arrive at an agreement. You can leave the mortgage, and attempt to make certain that your former spouse makes timely mortgage payments. However, this method is fraught with danger because in the event your former spouse ceases making payments on the mortgage, both of your credit scores will be adversely affected.
Nevertheless, there are ways to protect yourself in the divorce agreement. For instance, if the husband is to make alimony payments to the wife, he can make mortgage payments directly to the bank. Additionally, the agreement should state that if the spouse who continues to reside in the house fails to make a mortgage payment, the house must be sold or refinanced.
The divorce settlement and decree should also state that the spouse who resides in the house is solely responsible for paying the mortgage. This is significant because in your future application for a mortgage, you will be required to show the settlement to lenders, as the mortgage will still appear on your credit report.