How to Remove Mortgage After Divorce
Going through a divorce is not a pleasant experience, sometimes it can drain you both emotionally and even financially.
It can be further complicated by the process of settling certain joint liabilities, such as a mortgage loan. And while a divorce agreement may assign payment responsibility to either partner, the other may also remain financially liable to the mortgage lender.
If you’re worried about the loan affecting your credit, you must work with your lender to possibly refinance the mortgage to have it removed from your credit report after a divorce. Let’s consider other facts that you need to keep in mind if you plan to remove a mortgage after a divorce.
- What Are Some Challenges With Divorce and Your Mortgage?
- How to Remove a Mortgage From Your Credit Reports After a Divorce?
- What Are Some Challenges in Removing Mortgage after Divorce?
- Should You Refinance After Divorce?
What Are Some Challenges With Divorce and Your Mortgage?
Divorce is often a difficult and stressful process like we have mentioned earlier, especially when there are assets to split, including a house. Here, we explore different options to help you make the best decision for your circumstances.
Deciding to sell or stay
Deciding who will keep the marital home can get messy if both spouses want to stay in it.
“These decisions go more smoothly when you work with your spouse rather than being at each other’s throats,” says financial adviser Jeremy Runnels, CFP, of West Coast Financial in Santa Barbara, California. “It benefits everyone financially and emotionally.”
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Once the couple decides who should get the home after the divorce, they need to make sure the recipient can afford to keep it. It’s smart to take the long view when making this decision.
“It’s prudent to understand the long-term impact of staying in the home, even if it seems feasible over a shorter period of time because it can really affect other goals you might have,” Runnels says.
Refinancing your mortgage
Some couples decide to refinance a joint mortgage into one name upon divorce. What this does is release the spouse whose name is coming off the loan from responsibility for the mortgage.
However, unless that partner’s name is also removed from the title, they can still benefit from the sale of and equity in the home, so it’s important to not only refinance but also to update the title to reflect one owner. A quitclaim deed is commonly used to remove a spouse’s name from the title in a divorce.
A big factor for many divorcing couples is the reduction in income and assets that help borrowers obtain the best mortgage rates. The good thing is, that mortgage rates currently are very low, which could work to a divorced person’s advantage, provided they qualify. The mortgage rate you get after divorce will depend on the same factors that determine other borrowers’ rates, such as your income, debt, credit score, and the market environment.
The spouse applying for the refinance can use only their own income and credit score to qualify, however, Runnels says.
“The lender is going to look at the individual and make sure they’re OK having them as the sole guarantor,” Runnels says. “The issue is can you afford it, and that goes for either spouse.”
If a partner will receive alimony or spousal support, they can use that income to qualify for a refinance, as long as the divorce settlement stipulates that they will receive alimony for at least three years, Runnels says.
If the couple has equity in the home, the spouse keeping the house could apply for a cash-out refinance to pay their ex-partner their share.
“An experienced loan officer may need to think outside the box to achieve these goals,” says Michael Becker, loan originator, and sales manager at the Baltimore retail branch of Sierra Pacific Mortgage. “It may entail having the remaining spouse find a non-occupant co-borrower to qualify for the new loan. It may mean doing a cash-out refinance first to get part of the money to the exiting spouse, then following that up with a home equity loan to get the remaining money due to the exiting spouse.”
Selling your home
A divorce agreement might require the sale of the home and the splitting of profits if the couple doesn’t meet a deadline to refinance the mortgage into one spouse’s name. If neither spouse can afford the mortgage on their own, they may have no choice but to sell. It may be in everyone’s best interest to get rid of the place, pay off the mortgage, collect their share of the profits and start fresh.
In addition, if there’s a dispute over how much the home is worth, selling it is the best way to get the answer.
Besides the mortgage balance, couples should consider the costs they will incur if they sell or refinance the home. These might include Realtor commission, the costs of sprucing up the property to make it more attractive to buyers, real property transfer taxes and capital gains taxes.
Evaluating your home equity
Though selling the home is the only way to truly value it and calculate equity, that’s not always feasible or appropriate. The next best thing is to get a professional appraisal.
Sometimes, however, a couple might not agree on the appraised value. This can cripple efforts to move forward and can mean spending more time and money on attorneys and appraisers.
“In my practice, if the couple is cooperative and can decide on an appraisal company, that would be the best way to determine what the actual equity is in the home,” Ferreira says. “If not, each party should have an appraisal of the home and use an average value when determining equity.”
When you sell your house, you pocket the equity, less selling costs. It’s common for a couple to split the equity, as per their separation agreement, or use it to pay off other debts they accrued together.
Paying off your ex for their share
Let’s say the home is worth $300,000 and the couple owes $200,000 on the mortgage. They have $100,000 equity, so $50,000 will be needed to buy out the other spouse’s share if they have agreed to a 50/50 split.
To get the cash, one partner refinances into a $250,000 loan in their name only, and uses the $50,000 cash payout to settle up with their ex — but they have to be sure they qualify for the loan.
“Their income needs to be high enough to handle the new mortgage on their own, and the home must have the equity in it to take the cash out,” Becker says. “FHA and conventional cash-out refinances are capped at 80 person loan-to-value, while you can go to 100 percent on a VA loan.”
If you want to keep the house and don’t have the equity to do a cash-out refinance or the money to pay your ex their share, a HELOC or home equity loan could come in handy.
“You could look at doing either a home equity loan or a home equity line of credit, as some lenders will allow you to go to 95 to 100 percent of the value of your home,” Becker says.
Tax implications
Whether you sell the home as part of the divorce agreement or buy out your spouse’s share, capital gains taxes could come into play. This is a tax on the sale of capital assets, such as a home, when the profit exceeds a certain amount.
If you sell the home, you and your spouse can each deduct up to $250,000 of gain from your taxable income, but it applies only to the primary residence you’ve lived in for at least two of the last five years prior to the sale, according to the IRS. Vacation or investment properties don’t count.
The capital gains tax is a progressive tax, similar to ordinary income taxes, notes Francine Lipman, who teaches tax law at the University of Nevada, Las Vegas William S. Boyd School of Law. A wealthy couple might expect to pay as much as 20 percent on the capital gain from a home sale, Lipman says.
“To the extent, there are assets to split up, you do want to be aware of any built-in gain,” Lipman says. “There could be a real tax cost.”
On the flip side, a divorcing spouse should be cautious about taking a house that has depreciated.
“You have to be careful which assets you end up taking. Do you want a house with a big loss on it?” asks Lipman, adding that “taxpayers cannot claim losses on the sale of a principal residence [so] that might be a reason to hold onto the house and rent it out maybe, in hopes the market will come back.”
There are also tax considerations regarding alimony payments, which could affect a divorcing spouse’s ability to qualify for a new mortgage or to refinance the mortgage on the marital home.
According to the IRS, the spouse who earns a higher income and pays alimony can’t deduct those payments from their taxable income, but the spouse receiving alimony does not have to declare it as income. (This applies to divorces finalized after Dec. 31, 2018.)
The higher-earning spouse could make a case for paying less alimony, which can lower the receiving spouse’s income to qualify for a new loan, says Runnels.
Conversely, alimony payments might hurt the payer’s income and chances for a mortgage.
“Can a spouse afford the house and all the alimony and child support payments?” Runnels asks. “On the flip side, can the alimony (recipient) afford to keep the house, given they are responsible for all the expenses?”
Lipman recommends hiring a divorce lawyer who understands tax issues or who works with someone who does.
Removing your ex’s name from the mortgage
Only the lender can remove one spouse’s name from the mortgage.
“In almost all cases, the only way to get a spouse off a mortgage is to refinance them off of the mortgage,” says Becker. “If, for some reason, the spouse keeping the house is the only one on the current mortgage, then a quitclaim deed could be executed to get the exiting spouse off of the title to the property.”
Leaving their name on the mortgage can affect the ability of the non-resident spouse to qualify for another loan down the road to buy their own home.
“The biggest factor in qualifying for a mortgage is the debt-to-income ratio, and if you’re on another mortgage, that debt is going to be included in your DTI calculation,” says Runnels. “If you’re close to the limit, your DTI will be too high.”
A mortgage is a legally binding contract, separate from a divorce decree, Runnels adds. “If your name is listed on a mortgage, you are liable. You are a guarantor of that mortgage.”
Protecting your credit
Divorce is an emotional, often volatile event, but the worst thing divorcing couples can do is take financial revenge, experts say.
“Many times, out of bitterness, I’ve seen one or both spouses ruin the credit of the other spouse,” says Becker. “They decide that it’s the other person’s problem and refuse to pay bills that may be joint accounts. This can damage your credit greatly and keep you from being able to qualify for any mortgage for a long time.”
Runnels urges divorcing couples to keep paying all their bills through the divorce process to protect their credit.
“Close your joint accounts and get your own accounts set up,” Runnels advises. “If you’re arguing with your spouse over who is going to pay a bill, and you get a ding on your credit, it’s going to be harder to get a loan.”
How to Remove a Mortgage From Your Credit Reports After a Divorce?
The only way to have a current mortgage loan removed from your credit reports is if it is being reported incorrectly and you go through the process of disputing the loan. If the reported loan is legitimate, however, you’ll have to have your name removed from the debt as a liable party before it will come off your credit reports. There are several ways get your name off a mortgage loan:
- Refinance the loan. If you’re able to persuade your ex-spouse to refinance the loan into just his or her name, then you’ve accomplished your goal. A refinance would pay off the existing loan and create a new loan in just your ex-spouse’s name. Once that has been accomplished, the old mortgage loan would be updated on your credit reports to show as being paid in full, and payment activity would cease. The new loan would not be included on your credit reports, as you would have nothing to do with it.
- Sell the house. This is obviously a more complicated choice because you’ll need to find a willing buyer and move out of the house. If you are able to sell the house, you can use the proceeds from the sale to pay off the loan. Once you pay off your loan, it will be updated on your credit reports to show as being paid in full.
- Pay off the loan. This is the most difficult of the three options because it assumes you have the liquid funds needed to pay off a large loan all at once. If you or your ex-spouse pays off the loan, then there is no longer a debt or a mortgage associated with the house because you will own it outright. Once that has been accomplished, your mortgage loan will be updated on your credit report to show as being paid in full.
What Are Some Challenges in Removing Mortgage after Divorce?
There are a few challenges in removing a mortgage after divorce, which include:
- Refinancing mortgage.
- Decide to sell your home.
- Paying your spouse their share.
- Removing your spouse’s name from the mortgage.
Refinancing Mortgage
Once you file for a divorce, it is better to refinance a joint mortgage into one’s name because this helps in removing your spouse’s name from the mortgage.
When you remove your spouse’s name from the mortgage, they will still get some benefit from the home.
You can also get a quitclaim deed to remove your spouse’s name from the mortgage.
The mortgage rate you get after a divorce depends on the same factors as your income, debt, and credit score.
Decide to Sell your Home
Once you get divorced, you may refinance your mortgage, but a divorce agreement is necessary when you are planning to sell your home. If you and your spouse are not able to pay for the mortgage, then the bank will sell their home.
It might be in the couple’s mind to sell that property and share that amount and begin a new life.
Your house will be in the sale, not only you are not able to pay the mortgage, but you did not apply for refinancing till the deadline.
When you are in the middle of a divorce it is difficult to sell your home and is a stressful job too.
There are various factors to be noted down before you sell your home:
- Commission to the brokers.
- Make your property more attractive to buyers in cost-wise.
- Property transfer tax.
- Capital Gain tax.
If you want to keep the home and are not interested in refinancing, then you can pay your spouse’s share. If either one of the spouse’s incomes is high, then you can better pay your spouse’s share.
If you want to get cash, you can refinance for a certain amount in their name and use it to clear your spouse with their share. Make sure that you are qualified for refinancing.
Removing your Spouse’s Name from the Mortgage
Your spouse’s name will be removed only by the lender. If the house is in the name of your spouse and it is only one current asset, then you could use the quitclaim deed to remove your spouse’s name from the mortgage.
Only the lender can remove one spouse’s name from the mortgage.
When you leave your spouse’s name on the mortgage, it will affect them to get qualified for new loans.
Should You Refinance After Divorce?
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.
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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.
Conclusion
Removing a mortgage after divorce is a quite tough task. You must contact an experienced attorney who helps you to handle the legal requirements for retaining the home in your name.
Make sure that you take suggestions from people like a financial advisor, a mortgage broker, or a good divorce attorney.
In many divorces, the home is the most important part. It is vital to work on this mortgage in the correct way.
