The decision of divorce is always complicated, messy, and often painful, especially if your spouse wakes up one day and asks for a divorce. Things will get more challenging when there is a mortgage involved. Ideally, owning a home is the key to wealth for many families.
Whenever a divorce is brought in the picture, a couple may face the roughest time trying to balance between their finances and mortgage settlement. In most cases, a couple will have to choose who remains in their marital home or sell the house. Unfortunately, the idea of leaving one person in the home while another spouse looks for alternative accommodation is always easier said than done. This is because the court may rule both parties to pay for monthly mortgage settlement as part of child support in case the couple had children.
What if one spouse stops paying their share of the mortgage? That is when the complication sets in since the remaining spouse will have to pay twice the monthly settlements or lose the credit score. So, is it best to still settle the mortgage even when heading into a divorce? According to many financial advisors and divorce attorneys, keeping the old home after a divorce is one of the biggest mistakes you can make during a divorce process.
It will cause you more financial stress, affecting your credit score to plummet in case the other spouse stops giving their share. The bitter truth is that your mortgage lender will not care about your current situation and will expect you to pay for the mortgage on time. Therefore, choosing the best option to handle your mortgage as a couple before divorcing can help salvage the additional costs that may arise if you keep the house.
What If You Decide to Keep the Home?
The idea of keeping a familiar and comfortable home is more compelling, especially when there are children who might have to face a new environment. Suppose you want to keep the house and settle the mortgage, you need to examine your budget and weigh if you can afford to pay for the mortgage and still meet your financial goals like funding your retirement plan, insurance payments, and household bills. Therefore, to successfully afford the mortgage individually even after divorce, you can try the following strategies.
Refinancing the Loan
In most cases, retaining the ownership of the home requires you to buy out your ex-partner. For instance, if you have agreed on a 50-50 split of home value, you will have to come up with your ex-partner’s share and buy him or her out so that they can remove their name from the property title. If the partner moving out agrees, you can use a quitclaim deed to legally transfer the ownership of the property so that you become the only owner. In case you don’t have enough cash to buy out your ex-spouse, you will need to surrender other assets during divorce negotiation equal to the home equity, such as investment account, 401(k), or IRA. However, buying out your ex-spouse during divorce negotiation does not change the terms of the mortgage. The ex-partner’s name will remain on the mortgage unless the lender decides to remove it. Therefore, refinancing the loan is the best strategy to remove their names from the mortgage. In case you are thinking of refinancing, get help from a Loan Advisor.
Refinancing your loan is the most recommended way to remove your ex’s name from the property owner. The strategy helps them to secure their home mortgage. However, refinancing also comes with its limitations, especially when trying to qualify for a second loan as a single borrower. Lenders will need to examine your earnings, credit record, and savings to determine if they can repay the loan. Most lenders will reject your application due to lack of a second income stream and former partner’s solid credit record.
Therefore, to qualify for the second loan, you can ask for a family member or trusted friend to act as a co-signer, although lenders can come for them if you fail to pay on time. You can also use alimony and child support payments which are counted income., but only if the divorce agreement states that you will be receiving a certain amount for the next three or more years, and your ex-partner has made such payments on time for at least six months.
Mortgage Recasting
In the case where you cannot qualify for a refinance, but you expect some cash from a tax refund, inheritance, or alimony from your ex’s future bonuses, you can ask the lender to recast the mortgage by applying that sum to your principal payment. Recasting means amortizing the loan to reflect the more massive amount you have made. This keeps the same terms of the mortgage agreement but lowers the ongoing monthly payment. Once you have reduced the monthly payment, can now successfully turn your original marital home into a single house. Therefore, even after divorce, you can still settle the mortgage since recasting is the much lower cost of freeing up monthly cash flow and paying for the mortgage affordably.
Co-Owning the Home
If both of you agree to keep children in the same home until they are old enough to move out, co-owning the house becomes the best strategy other than refinancing and recasting.
However, this requires a high level of trust from both parties. The choice has worked for many couples in the short-term, especially if they could not find the buyer right during their divorce. Both names remaining on the mortgage means you are all liable for monthly payments. If your ex-spouse stops contributing, you are haunted for the full expense or risk falling in more debts, foreclosure, bankruptcy, or low credit score. Therefore, ensure you spell out clearly in the divorce agreement who will handle the mortgage settlement, insurance costs, and when to sell the house.
Final Words
Making a smart financial decision during a divorce can be more complicated, and it is worse when the decision involves the marital home. Sometimes, you can rush to make a choice that will land you in more troubles than before. Therefore, before you sign any divorce agreement, ensure you are with the right people who will advise accordingly. This means settling your mortgage even during a divorce is an excellent idea. Failing to pay off your mortgage will impact your credit score negatively and deny you the chance to qualify for any future loan.
Truth be told, whether you are getting a divorce or not, you will have to settle your mortgage since the actual terms of the loan do not change with the divorce agreement.