Refinancing and Divorce

If you own a home chances are that you are joint on the mortgage with your spouse.  If you are going through the divorce process, getting someone’s name off of a mortgage is often a very important consideration.  Here are several things to think about:

  1. Title vs. Mortgage.  It is easy to remove someone’s name from the title to the property.  This is typically done by signing something called a Bargain and Sale Deed.  On the other hand, it can be very difficult to remove someone’s name from a mortgage.
  1. “Cash Out” Refinance.  Sometimes people need to do a “cash out” refinance in order to remove someone’s name from a mortgage and buyout their interest in the property.  Most lenders will only allow you to increase your mortgage up to 80% of the total value of the property (this is called “loan to value ratio”), although a few lenders will allow you to take up to 85% loan to value.  For example, if your home is worth $400,000 and you owe $280,000 and your lender will allow you to go up to 80% loan to value, this would mean that the maximum you could take out is $40,000 in cash which would put your total mortgage at $320,000 (which is 80% of $400,000).  This would allow you to remove the other person’s name from the mortgage and pay them $40,000, but you would then have a $320,000 mortgage.
  1. Low Income Refinance.  If someone has had little or no income for an extended period of time it will be difficult to refinance, but it’s not impossible.  Different lenders have different requirements, of course, but many lenders will work with someone if they can show that they have received support (spousal and child) for six months and will receive it for at least three more years at the level of support the lender is relying on.  You should check with your lender for their specific requirements.  Since different lenders may have different requirements you may consider checking with a few different lenders.
  1. When to File.  If you have a pending divorce case a lender may not want to work with you until the divorce is final.  From the lender’s perspective they want to make sure they know how much support someone is paying or receiving, and they also want to know if someone else will have an ownership interest in the house after the divorce.  One strategy that people will sometimes use is to complete the refinance before the divorce and then file the divorce once the refinance is complete.  If you are planning on doing this it is important that you answer your lender’s questions honestly about your situation.  For example, if they ask you if you are about to go through a divorce and you know you are, then you need to disclose that information.  Another strategy is to wait until the divorce is complete before filing for the refinance so you can provide the judgment to the lender immediately.
  1. Timing of Refinance.  It is important that you set a timeline on the refinance of the house.  People will frequently agree that the former spouse can remain in the home for a period of time until the home sells or can be refinanced.  If you are the person who moves out but your name is still on the mortgage, it is important from your perspective that you agree to a timeline by which your name must be off of the mortgage.  This timeline might be as little as three or six months, or it could be several years.  It is not unusual at all to agree to a timeline that allows a child to get through a certain school before requiring the refinance.  If the refinance cannot be accomplished, then typically the judgment says that the home must be sold.  Although this may seem harsh, the person who is not living on the home needs to know that they will be off the mortgage at some point.  The person not living in the home may not be able to qualify for another mortgage until they are off the mortgage.  Perhaps more significantly, being joint on a mortgage means that you are dependent on someone else paying the mortgage to make sure your credit doesn’t suffer.
  1. Credit Risk of Remaining on Mortgage.  If you are joint on a mortgage and the other person does not make the mortgage payment, the lender will call you looking for payment.  It does not matter to the bank that you have a judgment that says the other person is supposed to pay.  As far as the bank is concerned, you both applied for the mortgage so you are both responsible for the payment.  If you pay the mortgage for the other person the judgment typically provides that they have to reimburse you, but that provision doesn’t do you any good in the short term.
  1. Loan Assumption vs. Refinance.  Even if you can refinance, it may not be preferable to refinance.  You may have a mortgage interest rate of 4% or less, so refinancing into a higher rate is not very appealing.  If that’s the case, you should ask your lender if they have a “loan assumption” or “name deletion” process.  These processes allow you to remove someone’s name from a mortgage without making any other changes to the mortgage.  This means that if you have a great interest rate you can keep it.  Another benefit of doing a loan assumption is that the fees for an assumption are typically a lot less then for a refinance.
  1. Refinance Fees.  One thing to consider when refinancing is who is going to pay the refinance fees.  Often in a mediated divorce the clients will split the refinance fees.  The idea is that since both people benefit from getting someone’s name off the mortgage, they should both share in the cost.  If you are going to split these fees you should make sure that you are just splitting the actual fees and not any of the prepaid costs such as homeowner’s insurance or property taxes.

One benefit of going through the divorce mediation process is that the timeline and all decision-making is completely up to the clients.  For clients who can work together effectively, the divorce process can be utilized to insure that both people are able to own their own homes in the future if that is their goal.  A little bit of strategy during the divorce can go a long way to achieve a client’s interest of security, stability and home ownership.