How Does a Mortgage Work in a Divorce?
Divorce may be a difficult and complicated process, which is why there is a separation time before the divorce so that the parties can work out their legal arrangements. When couples separate, they agree in writing on issues like child custody, spousal support, child support, and the distribution of the relationship’s assets and debts, which frequently includes the home and its mortgage.
Read More: Divorce & Separation Mortgage
A divorce (if the parties have been legally married) simply signifies that the marriage is over and that both parties are free to remarry, whereas a separation agreement deals with how the financial liabilities of both parties will be divided. First comes the Separation Agreement.
How To Go About The Separation Process
Even if things aren’t always simple when a couple is divorcing, it’s crucial to start working on a separation agreement as soon as possible. If both parties agree to collaborate as much as possible and acknowledge the importance of the actions that must be taken, the process of legally separating your affairs will go much more smoothly.
In less amicable cases, the separation agreement will likely involve going to court and the assistance of a family law attorney for each party. Both of you may find this unpleasant and much more expensive. In the worst case scenario, one of you pushes the other into foreclosure and bankruptcy by lack of cooperation and emotionally heated unreasonable behavior (sadly this happens with some regularity).
There are several great resources on the internet for property and debts acquired jointly during a relationship. To better yourself and your relationship, please educate yourself. You can start to think logically through the process and begin to remove some of the emotion with the aid of these sample checklists and guidance. Find out what will hold up in court and what won’t.
Your objective should be to get you and your spouse to agree on the appropriate course of action so that you can both leave as soon as possible and have clear financial options for securing mortgage financing for your existing house or a future purchase. Mortgage possibilities can only be investigated once you and your partner are close to an agreement on the Separation Agreement.
The General Issue
An obligation in terms of money is a mortgage. From the perspective of a mortgage lender, they desire (and demand) that the parties to the existing mortgage correctly resolve that one before moving forward to purchase another property.
Remember that even if you no longer own or use the property, you are still responsible for the debt as long as your name is still on the mortgage. Being fiscally responsible will affect your future borrowing capacity.
As a result, even if one of you decides to keep the house and agrees to make the mortgage payments, so long as the other party’s name is still included on the loan, they are also liable for the payments if the other party defaults (illness, job loss, revenge, etc.). There are many possible outcomes here that could capsize your ship. Avoid going there. Mortgage lenders most certainly won’t.
The less visible factor that affects future mortgage qualification is the requirement for spousal and/or child support. The Separation Agreement must specify these monetary responsibilities. If there isn’t one, you’ll need to get one before speaking with mortgage lenders. Here’s why:
Any payments must be considered monthly responsibilities because doing so will reduce the amount you can riskably borrow for your subsequent mortgage. Before approving you to borrow again, lenders need to see that the payments would be zero in writing.
On the other hand, any support payments you get can be considered income and may boost your ability to obtain a mortgage if paired with other employment-related income. (Note that for mortgage qualification purposes, assistance income normally cannot exceed one-third of your total income mix.)
Options for Getting Out of a Joint Mortgage
There are several options for couples looking to get a divorce and break their joint mortgage, some of the most popular and sensible ones are listed below.
Sell The Property
You both consent to ending the mortgage agreement, selling the home and paying out the lender in full, together with any transactional expenses like a penalty for early mortgage repayment and/or real estate commissions. The remaining funds (the “net equity”) may be divided as decided. This can be done without a mortgage broker.
Release of Covenant
The party who must vacate the property asks the mortgage lender for a “release of covenant.” While the other is released, the person who stays is termed to “assume the mortgage” and must requalify to carry the mortgage solely on their own financial credentials. The parties must have sufficient funds from other sources to settle their disputes because no money will be available from this method.
A few hundred dollars may be charged by the lender as processing fees, and $1000 may be spent on legal fees. The lender typically does not request an appraisal. A mortgage broker is not necessary for a Release of Covenant.
Tap Into The Equity
The party that wants to stay in the home may be able to refinance the mortgage in their own name to up to 95% of the home’s appraised worth in order to buy out their partner if there is equity in the property and some of that equity is necessary for settlement with the other party. This frees the other party from the mortgage and, ideally, frees up enough money to settle the dispute.
Keep in mind that the party staying cannot withdraw money for personal purposes or to pay off debts. (Hint: It’s not necessary to distribute the equity equally 50/50.) The person who intends to remain must be capable of obtaining a mortgage on their own. Please feel free to complete our mortgage pre-qualification form.
What Happens If Your Property Has No Equity
The only way to get out of this agreement (if you can’t write a check to the bank for the shortfall) is to hold onto it until there is enough equity to sell. This is known as negative equity. My preferred solution here, if the parties can reach an understanding, would be to lease the property to a tenant for fair market rent. The rent payments can be used to pay the mortgage, property taxes, and other expenses.
The details between the two parties are spelled out in the joint venture agreement. The negative impact on further mortgage borrowing is much lessened because the parties now have rental income to offset the property expenses. For a nominal charge or another consideration, we can offer advice on this option and possibly assist with setting it up.