When there is equity in the home, everyone wants their share of the money as part of the final divorce. But, when one person wants to remain in the home, the party who decides to stay in the home will likely have to qualify for a mortgage on his or her own.
Staying in the Home
There are a lot of issues involved in the marital home, and when applying for that post-divorce mortgage. I’ve written before about property divisions when the housing market was down. Now that the housing market is in recovery, different issues arise.
Spouses who choose to stay in the home may have to refinance the mortgage to cash out enough equity to pay off their soon-to-be Ex. Even a spouse who has the financial resources for a buyout will still have to get a mortgage in his or her name.
The spouse walking away from the house, not only wants their share of the equity in the property, but need to get their name off the existing mortgage for a couple of reasons.
First, their name must be removed so their credit score won’t reflect the debt, that way they won’t be liable for any non-payment.
Once your name is on the mortgage, you are jointly and severally liable for the entire debt amount. The mortgage can tie up your credit, making it difficult to qualify for another mortgage, or even a car loan.
Worse still, if there’s a default or late payment of the mortgage – you are not only going to be sued – your credit report score could drop considerably, even though you are not at fault.
Investopedia offers a few tips to give yourself the best chance at getting a new mortgage after your divorce.
Pay the current mortgage
Even if you moved out of a jointly owned home during your separation, if your name is on the mortgage, you are still responsible for the payments. You may want to ensure that your spouse is keeping track of the bills to avoid damaging your own credit.
If your spouse refuses to make payments on the mortgage, and you rack up late notices or even a foreclosure, your own credit score can be badly hurt.
The result of a poor credit score could be a much higher interest rate on your new mortgage, which will cost you thousands over the lifespan of the loan, or rejection.
Remove your name from the mortgage
Your settlement and divorce decree may declare that you’re no longer responsible for the mortgage on the former marital home, but not in the eyes of the mortgage company! Before you can qualify for that post-divorce mortgage, you may have to refinance.
Unfortunately, getting your name off of the existing mortgage isn’t easy. In order to officially have your name removed from the mortgage, the spouse keeping the home will either have to refinance the home and qualify for an entirely new mortgage, or sell the home.
Until either of two choices are made, the mortgage payments are still directly linked back to your own credit — no matter what your divorce decree states.
In these situations, it is not unusual to add a clause to your agreement giving a party a period of time to either refinance the house or sell the house.
Don’t buy a new home yet
As with all major life changes, your divorce will significantly affect your financial status. Hold off on your decision to apply for that post-divorce mortgage and buy that new home until you’ve had time to adjust to a newly single income, child support payments, and alimony payments.
Purchasing a new home immediately after your divorce is final can be tempting, but don’t forget to take care of these three items first.
By making financially wise decisions with your current mortgage, you’re setting yourself up for success—when the time comes to get a new mortgage and move into your new home.
The Investopedia article is available here.