Divorce and your mortgage: Here’s what to know

One of the biggest decisions divorcing couples face is what to do with the marital home. It’s often a messy affair. And if that marital home has an outstanding mortgage, the situation gets extra complicated.

Here’s what to know about divorce and your mortgage.

Mortgage options in a divorce

Depending on the details of your mortgage, the circumstances of your divorce and other variables, your options for how to split a house in divorce might be limited. Here’s an overview of all possible next steps:

1. Sell your home

Often the easiest way to address the marital home is to sell it and split the profits. Depending on where you are in the divorce process, you might agree to sell the home while the case is still pending rather than after it’s settled.

If you go this route — and many couples do — consider the costs. These might include the Realtor’s commission, the costs of repairs or staging, property transfer taxes and capital gains taxes. These expenses typically come out of the proceeds of the sale.

2. Refinance your mortgage

What are your rights if your name is not on the mortgage? Some divorcing couples with a joint mortgage decide to refinance to a new mortgage in only one of the spouse’s names. This releases the removed spouse from responsibility for that mortgage.

However, unless that partner’s name is also removed from the title, they can still benefit from the sale and equity in the home. It’s important to not only refinance but also update the house title to reflect one owner. When only one spouse is on the mortgage but both are on the title, you’ll need a quitclaim deed to remove one spouse’s name from the title.

Keep in mind: The spouse applying for the refinance can use only their own income and credit score to qualify, says Jeremy Runnels, CFP, of West Coast Financial in Santa Barbara, Calif. “The lender is going to look at the individual and make sure they’re OK having them as the sole guarantor.” That could mean less advantageous terms. The state of current refinance rates could result in a much higher rate on the new loan, as well.

But if the borrower will receive spousal support, they can use that income to qualify for a refinance as long as the divorce settlement stipulates that they will receive the support for at least three years, says Runnels.

If a substantial amount of equity is built up in the home, the spouse keeping the house could alternatively apply for a cash-out refinance to pay their ex-partner their share (more on that below).

3. Pay your ex for their share of equity

Let’s say your home is worth $300,000, and you owe $200,000 on the joint mortgage. In this case, you’d have $100,000 in equity, so you’d need $50,000 to buy out the other spouse’s share (assuming a 50/50 split).

To get the cash, you could refinance into a $250,000 loan in your name only, and use the $50,000 cash payout to settle up with your ex. You’ll need to qualify for the refinance, however.

“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,” says Michael Becker, loan originator and sales manager at the Baltimore retail branch of Sierra Pacific Mortgage. “FHA and conventional cash-out refinances are capped at 80 percent 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 enough equity to do a cash-out refinance or the money to pay your ex their share, the solution might be a home equity line of credit (HELOC) or home equity loan. “Some lenders will allow you to go to 95 to 100 percent of the value of your home,” says Becker.

Divorce and mortgage considerations

Before diving into any particular course of action, consider the long-term impact on your finances.

Evaluating your home equity

Whether you plan to refinance the joint mortgage or sell the home, you’ll need a professional appraisal report to determine its worth, and the equity stake the parties have to split.

Sometimes, however, a couple doesn’t agree on the appraised value, or how much of a stake each spouse is due. This can cripple efforts to move forward and can mean spending more time and money on attorneys and appraisers. In this situation, the parties should strive to agree on which appraiser to work with and to accept the outcome of the valuation, whatever it might be.

If you are selling the home, you might decide to split the proceeds (less closing costs and any repairs and improvements) or use it to pay off other debts you accrued together. Likewise, some couples include a provision in their separation agreement that they’ll accept the first offer on a home, provided it’s within a certain percentage of the list price.

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 assets, such as a home, when the profit exceeds a certain amount.

If you sell the home, you and your spouse might be able to deduct up to $250,000 of gain each from your federal taxable income, but it applies only to the primary residence you’ve lived in for at least two of the last five years before the sale.

There are also tax considerations regarding spousal support payments. The spouse who earns a higher income and pays spousal support can’t deduct those payments from their taxable income, but the spouse receiving the support does not have to declare it as income.

The higher-earning spouse could make a case for paying less spousal support, which can lower the receiving spouse’s income to qualify for a new loan, says Runnels.

Conversely, spousal support payments might hurt the payer’s income and chances for a mortgage.

Protecting your credit

Divorce is an emotional, often volatile event — but the worst thing divorcing couples can do is take financial revenge.

“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 on joint accounts. This can damage your credit greatly and keep you from being able to qualify for any mortgage for a long time.”

The bottom line: Keep paying all of your bills through the divorce process to protect your credit.

“Close your joint accounts and get your own accounts set up,” says Runnels. “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.”

Other financial implications of divorce

As outlined above, a divorce can have significant ramifications when it comes to various financial matters. Be prepared for changes to different money-related factors that affect you, including:

• Your credit score. Divorce or separation itself does not directly impact your credit score. If you and your former spouse have kept your finances separate, your credit should remain unaffected. However, shared credit accounts or debts, such as home loans, can negatively affect your credit if not managed properly. Also, if you assume a mortgage entirely, it could affect your credit score — especially if you refinance it at a different rate.
• Credit limits. During or after a divorce, your credit limits on credit cards may decrease. If you are an authorized user or joint account holder and your income changes, creditors may review and adjust your credit limit. This can affect your credit utilization ratio, which is basically how big your outstanding balances are — how close you are to maxing the cards out. This ratio is a significant factor in calculating your credit score.
• Tax withholding. When an individual gets divorced or separated, they typically need to submit a new Form W-4 to their employer to adjust their tax withholding accordingly. If they receive alimony, they might need to make estimated tax payments.
• Alimony payments. Certain alimony or separate maintenance payments can be deducted by the payer and must be reported as income by the recipient spouse. But alimony or separate maintenance payments made under divorce or separation agreements nowadays are not deductible by the payer, nor are they considered taxable income for the recipient. This also applies to agreements made before 2019 that are modified after 2018, if the modification specifically states that the repeal of the alimony deduction applies. Payments received under such agreements do not need to be reported as income by the recipient spouse.
• Tax filing status. Divorcing couples who are still legally married at the end of the year are considered married for tax purposes and must choose an appropriate filing status. The possible filing statuses for separated or recently divorced individuals include: married filing jointly, married filing separately, head of household, or single.

FAQ about divorce and mortgages

• What happens if I keep my ex on the mortgage?

  Even if you plan to hold onto the house and pay the marital mortgage yourself, the names on the loan are ultimately the ones responsible for paying it — including your ex.If for some reason you can’t pay the mortgage, your ex could refuse to pay it, damaging both of your credit scores and making it harder for you both to qualify for another loan. It’ll also be much more challenging to sell, gift or bequeath the home because your ex could claim some ownership of the property. In general, it’s best to take your ex’s name off the mortgage and move forward with your own, new loan.

• Do I have to inform my lender of the divorce?

  It’s important to inform your mortgage lender or servicer of your divorce. This could help you avoid delinquency issues if your ex decides to stop paying the loan, or their share of the loan payments, before the divorce agreement is finalized.

• How can I protect myself from being responsible for the mortgage if my ex-spouse fails to make payments?

  This unpleasant possibility means contacting your divorce attorney, as well as pleading your case to your mortgage servicer and possibly to the judge in your divorce. Communicate with your servicer as soon as possible and provide any relevant documentation, such as a divorce decree showing which party is responsible for mortgage payments.

• How does a divorce impact a person’s ability to buy a new home?

  Following a divorce, you may find it more difficult to get home financing, depending on your circumstances. If you try applying for a mortgage loan by yourself, it could be more challenging to qualify if your earnings, savings and credit rating as a sole borrower are substantially less than when you were part of a couple. Additionally, if the divorce has increased your debt, lenders may find you less creditworthy.To enhance your likelihood of obtaining a mortgage post-divorce, craft your divorce decree in a way that supports verifiable income. Documented evidence of child support or alimony payments received for at least six months is necessary. Also, ensure you have verifiable income, preferably in full-time employment (if you’re returning to the workforce, you might want to put home buying on hold until you have at least six months under your belt). Additionally, monitor your credit score and take measures to boost it. Lastly, collaborate with a reputable and knowledgeable mortgage professional who can offer various financing options tailored to your situation and even your sex (there are those specializing in single women, for example).

Additional reporting by Erik Martin