What Happens to your Mortgage in a Divorce?

Feb 25, 2019 HSH Editors,HSH.com

Updated by Craig Berry

Marriage and homeownership have long gone hand-in-hand. Unfortunately, nearly 50 percent of the time, marriages end in divorce.

The good news is that, according to recent studies, the divorce rate has been falling. Even so, with more than 61 million married couples living in the U.S., combined with a divorce ocurring every 13 seconds, it's helpful to understand what happens to your mortgage in a divorce.

Divorce and your mortgage

Divorce is never a happy circumstance and the financial necessity of selling your home can compound an already stressful situation.

The initial decision of whether to keep the house or sell it typically involves two different types of decisions: emotional and financial.

From a financial perspective, selling the home is a common solution when married couples get divorced. Typically, you and your spouse agree to split the profits according to a pre-determined agreement after the house sells.

Equity is a very important factor when selling your home. The amount of equity determines how much money the sale is likely to net.

When it comes to determining that net number, there are other considerations to note. Between realtor commissions, seller concessions and the possibility of repairs, sellers typically lose between seven and ten percent of the home's value during the sale.

For example, if you were to sell your home for $250,000 you could end up with only $225,000. If you owe $200,000 on your existing loan, you would have a net income of just $25,000 in actual equity to divide. Worse yet, using the same example, if you divorce but your current mortgage loan has a balance of $225,000 or greater, you may have no equity left after selling.

After you've answered the question about your equity position, others may arise. Who will get what share of the total, and what will the tax implications be on those amounts?

While the financial aspect involved in the decision to sell may be black-and-white, the emotional one can make things more complicated.

Keeping the focus on facts as opposed to feelings may help with the decision. For many couples, keeping a once-shared house post-divorce involves major financial sacrifices. In some cases, either spouse may be capable of making the mortgage payments on their own.

However, it may also come down to neither spouse being capable of making the payments. As a result, selling the home may be the only feasible option.

How to keep your house in a divorce

Regardless of divorce, not everyone wants to sell their home. Fortunately there may be other options.

Generally, the cleanest solution for how to keep your house in a divorce is refinancing, leaving only one person's name on the new loan.

According to Carl Palatnik from the Center for Divorce and Finance, "If you're keeping the house, the best way to deal with the mortgage is usually for one spouse to refinance." According to Palatnik, "Maintaining that existing mortgage post-divorce is something to be avoided because you're financially connected to someone you don't like or don't get along with, and there are risks associated with that."

The biggest risk is generally that the lender will continue to consider both spouses jointly and individually responsible for the payments. That means a late or missed payment can affect both spouses' credit, regardless of any agreement between them to the contrary.

A cash-out refinance could be helpful. Not only would it leave just the person whose name is on the mortgage responsible for making the monthly payments, the cash could also be used to pay out the portion of the equity owed to the departing spouse.

If your post-divorce income isn't enough to be approved for a new mortgage on your own, you may want to ask a parent, sibling or adult child to be a co-signor. If you expect to receive alimony or spousal support, you may be able to use that income to help qualify for a refinance.

The question of whether or not this income can be used for qualifying purposes typically comes down to a number of specifics. In addition to the amount being received, your lender may have additional documentation requirements. Besides being court-ordered, most loan programs require proof of continuance for three years, and sometimes documentation supporting a record of receiving it is necessary.

Other considerations for divorce and your mortgage

There may be options for assuming a mortgage after divorce. In order to assume a mortgage, you have to qualify individually for the new loan.

Both you and your lender would need to sign an assumption agreement spelling out the terms of the assumption and releasing your former spouse from liability. Even if your name was not on the mortgage, once you own the property and receive lender approval, you may be able to assume the existing loan.

Assuming a mortgage loan isn't always your best option, however. You should weigh the possibilities of obtaining a new mortgage vs. assuming a mortgage after divorce. Getting a new mortgage could be more beneficial if interest rates are lower, or the new payments are more affordable.

Whether you sell the home as part of the divorce agreement or you buy out your spouse's share, capital gains may come into play. This is a tax on profits from a property's sale where the amount you receive exceeds a set figure.

With the Tax Cuts and Jobs Act that went into effect January 1, 2019, a spouse who earns a higher income and pays alimony loses a long-standing alimony deduction and must pay federal taxes on it. Meanwhile, the spouse receiving alimony won't have to pay taxes. See IRS Publication 504 for more details.

If getting divorced is an eminent part of your future, owning a home together can make things more complicated. Knowing how to properly handle your divorce with a mortgage loan involved can help you and your ex go your separate ways in the best way possible.