Finances are probably one of the first things people try to get sorted out while going through a divorce. When it comes to the mortgage, there are a few different scenarios that can happen depending on how the property is financed. Usually people think that they can just buy their ex out of the mortgage, but after the 2008 mortgage crisis it’s a little easier said than done. The high rates of foreclosures and short sales in 2008 caused lenders to tighten up on their mortgage qualifications.
Also, figuring out what will happen to the mortgage is a lot more difficult if neither party will budge on what they want. So typically, the more amicable the divorce, the easier the process will be. Most of the time the spouse that is more eligible to qualify for a new mortgage at the time of the divorce will likely be the one to leave the current mortgage. Attorneys usually factor in the value of the home when they are separating all of the other marital assets as well.
Financial responsibility doesn’t just disappear when the divorce is finalized either. Both persons on the mortgage are responsible for the payments until the home is sold or refinanced. If one spouse decides to keep the current home, they can refinance to get the other person off the title and mortgage. This can only work if the spouse keeping the home has good credit and enough income to be alone on the mortgage. Also, keep in mind that all of the mortgage payments in the past 12 months must have been on time to refinance. Also, both spouses must agree to the terms before the home can be refinanced.
In the event that neither of the spouses can buy the other out, they may be able to sell the home through a short sale, assuming the real estate market won’t support the full debt still owed on the mortgage. A short sell is a situation where the bank will take less than is owed on the mortgage to avoid foreclosure status. The mortgage lender will consider all the assets and debts when deciding if they can approve either of the spouses.
Once a divorce is finalized the spouse obtaining a new mortgage will have to provide the lender will all pages of their divorce decree. This shows the lender all payments of alimony and child support the borrower has, which helps determine their debt to income ratio. If the debt to income ratio is too high with the alimony and/or child support, the borrower may not be approved for the mortgage.
Take a look at our checklist to see the basic documents you’ll need to apply.