Effect of your Mortgage after Divorce
What Happens to a Mortgage After Divorce?
Divorce is a major decision that’s often triggered in an instant. The actual separation and finalization of the divorce, however, can take many months. Some loose ends could even stretch on for years if the couple doesn’t plan properly when they separate.
When You Have A Mortgage Together
This situation can make divorce even trickier. The mortgage has both of your names – meaning, your combined qualification stats made you eligible for the loan. Individually, it’s possible neither you nor your spouse would qualify for a home loan. In this case, selling the home might be your only option. Selling your house in California and paying off the mortgage is also a sensible route. Both you and your spouse will have fast closure – and if you use a cash buyer, your divorce process could take many months less.
Can One Party Choose to Keep the Home?
However, liquidation will be necessary if neither can agree who gets to keep the home. The disagreement usually forms when there’s a conflict in how much equity each party deserves. The law typically sides with each individual receiving 50% of the gained equity upon sale. The amount each person put into paying off the mortgage will be taken away before calculating this equity amount.
Usually, one of the two parties will perform a buyout. If there is considerable equity built up already, it’s possible for one party to qualify for financing without the other co-applying. The lender will look at the accumulated equity as a reduction in lending risk and therefore qualify you to borrow more.
Remember, if you decide to buy out the other party you must pay for their share of the home’s equity. So if the home was $100,000 and you guys paid $50,000 off, chances are you will need a $75,000 home loan to buy your spouse out. If the home dropped from $100,000 to $75,000 in value, by the time it’s appraised for the buyout, only $12,500 would be owed to your spouse but you would still need a sizable mortgage.
What to Know Before Buying Out Your Spouse
Is there below 20-percent worth of equity after you buy out your spouse? The drop below the 20-percent level could happen if you need to refinance, instead of paying the difference in cash. If so, up to 2 percent annually could go toward private mortgage insurance (PMI) costs. This added expense must be calculated carefully as, with little equity to help, it might make the mortgage too unaffordable for you.
Now things get more complicated. You need to pay for a home appraisal to determine its fair value. This valuation will come in handy when applying to refinance the home. However, it will also determine what equity the other spouse deserves right now. The amount you need to pay to buy out could be more than expected, supposing the market value increased in recent years. On the flip side, after buying out your spouse you will become subject to any appreciation in the future.
Another important thing to look at is any penalties that might come from terminating your current mortgage agreement. If you have a fixed-term home loan, this could be a spell for trouble. Even worse, the Federal Reserve has increased interest rates over recent years. If you purchased three or so years ago, now the interest premiums will be greater – meaning you will qualify for less when you apply for a mortgage.
Selling a Home When Divorcing
Many partners decide to simply sell their home when they split. This decision is usually the result of spouses making the choice to downsize their lifestyles. For a single adult, unless kids are involved, the amount of space previously shared between the couple is not so significant. For any single parent, the cost of maintaining the home and mortgage is often too severe. With many little expenses and headaches that can surface while trying to do an equity buyout, there’s no doubt a straightforward sale makes sense.
The only case where selling your home might be difficult is if the figure that’s owed is more than the sale amount. The “negative equity,” which is anything left owing, will be a liability for both of you. If possible, you might want to settle the sale process quicker through a cash buyer. These buyers can help you skip the home inspection charge, avoid realtor fees and simplify the whole transfer of ownership.
Remain Responsible While Divorcing
It’s incredibly important to keep up-to-date on any and all home-related expenses. Pay your mortgage payments on time, keep up with the taxes, etc. If your spouse refuses to pay their share, make sure to document everything you pay on your own. This fact will only make it easier for you to defend keeping the home for yourself — if that’s what you want to do.
Even more important, your credit is at risk right now. Divorcing will change your finances and it could even indirectly harm your FICO score. If you have joint accounts, your divorce decree could be used to remove your name from your spouse’s credit-related accounts. This action would take away any negative impact those accounts were having on your credit score. Once the mortgage is off, it will be easy to keep your credit score high.
This brief explanation gives some insight into what happens to a mortgage after divorce. The steps required to perform an equity buyout are definitely painful. If one person is willing to do this, though, it is definitely recommended. For the selling party, it means securing their share of equity-based on the home appraisal value – instead of the rate, they get after selling the house on the local market and paying realtor fees.
No doubt, you will have some stressful days ahead. You’ll have to work with your spouse to plan out the equity buyout agreement or to make sure the house sells for a fair value. You and your spouse should work with a real estate attorney to make sure the arrangements made are as executable and fair as possible.