If you’re going through a divorce, there’s a good chance you’re already feeling emotionally taxed. Add in the stress of legal proceedings and the necessary mountains of paperwork, and things can get overwhelming fast. If you and your ex-spouse are dividing up property after a divorce, refinancing your house could be one way to move forward.
Refinancing Your Mortgage After A Divorce
To understand whether you need to refinance after a divorce, it’s important to note the differences between the names on your home’s mortgage and the names on the title.
Names On The Mortgage
The names that are on the mortgage show who’s responsible for paying back the debt. If both you and your ex-spouse’s names are on the mortgage, then both of you are liable for the mortgage payments. If your ex-spouse is on the mortgage with you, there are a couple of ways to remove their name from the mortgage.
How To Remove A Spouse’s Name From A Mortgage
• Release of liability: First, you can ask your lender for a release of liability. This is a document that releases a borrower from their obligation to pay back the loan. However, there’s no guarantee that your lender will issue one. Many, including Rocket Mortgage®, won’t do this.
• Refinance: If you can’t get a release of liability, then the only other option is to refinance the mortgage. When you do this, the spouse remaining on the mortgage needs to qualify for the new loan using only their income and assets.
• Names On The Title: The names on the title, on the other hand, show who owns the home. It’s possible to be on the title without being on the mortgage. For example, if one of you didn’t have income at the time you got the mortgage, then it may have made sense for only the income-earning spouse to apply. If your ex-spouse is on the title to the home, removing them from the title is only a matter of paperwork.
How To Remove A Spouse’s Name From A Home’s Title
• Quitclaim deed: You can have your ex-spouse sign a quitclaim deed, which will transfer their ownership of the property to you. You’ll need to do this to refinance the home.
• Home sale: If you aren’t able to get a release of liability or qualify for a refinance without your spouse, then an easier path may be selling the home. Selling the home allows you to easily split the proceeds of the home. That way, you can divide your assets and move forward.
Reasons To Refinance After Divorce
There are a few reasons why it may make sense to refinance your home after getting divorced. Let’s take a closer look.
• Purchase A New Home: As mentioned above, a refinance is one way to remove someone’s name from the mortgage. This protects the spouse who no longer has ownership interest in the home. This can be important if that spouse plans to purchase another home or take on other debt.
• Protect Your Credit: If your name’s on the mortgage, then you have a legal obligation to pay it. If your ex kept the house but misses or is late on mortgage payments, your credit could be affected. A refinance that removes your name from the mortgage will ensure you’re not held responsible for debt that isn’t yours anymore.
• Take Cash Out: Property values have climbed over the past several years, which means you might have enough equity to get cash from your home. A cash-out refinance can be one way to split assets with your spouse. Say you want to keep the house but need to buy them out of it. With a cash-out refinance, you could get money from your home to pay your ex-spouse for their share of the equity in the home.
Your divorce decree doesn’t affect your liability for debt. Divorce decrees are issued by the courts at the end of divorce proceedings and state the division of your property. However, your lender is not legally required to take any action as a result of your divorce decree. This means they can still hold you and your ex-spouse liable as long as both your names are on the mortgage.
If you’re going through a divorce and want to keep the family home, you will likely have to buy-out your spouse by paying an amount equal to his or her interest in the home.
For example, let’s say that you (Sally) and your spouse (Tom) own a house valued at $300,000, subject to a mortgage with an outstanding balance of $200,000. Under this scenario, the equity in the house is $100,000. If you and Tom split your assets 50-50, you would each have $50,000 of equity. If you want to keep the home after the divorce, you will have to pay Tom his 50% share, or $50,000, to buy him out. Note that not all couples split their equity 50-50; this is discussed in more detail below.
Unless you have a large pile of cash sitting around that you can use to buy Tom out, or you have other assets you can give Tom in exchange for his share of the home, (for example, retirement funds), you will need to find an alternative. A common way for divorcing spouses to accomplish a buy-out is to refinance the home (making sure the new loan is in buying spouse’s name alone), and take out enough cash from the home equity to pay the non-buying spouse his or her share. Once that’s done, the home must also be transferred into the buying spouse’s name alone.
Your first step is to figure out your share of the “equity” in the home. Home equity is created when the value of your home increases and/or when you reduce the amount you owe on your home through your loan payments. In order to determine the amount of equity or ownership you have in your home, you must:
• value the house
• subtract the outstanding mortgage balance, and
• calculate your share of the remaining equity.
How Do I Value the House?
The first step in this process is to determine a current home value (meaning what it would sell for today). There are several ways to do this.
When Spouses Can Agree On a Home Value
Some couples can easily agree on a home value. They can check local websites such as www.zillow.com or www.trulia.com, both of which provide estimated home values based on local comparable sales. You can also look at the tax assessed value used by your city or county for the property taxes on the home, but this value is often unreliable. The best way to determine a value may be for the two of you to ask a trusted real estate agent in your area, who may have more recent comparable sales and can give you a good estimate of what your home, might sell for. If you and your spouse can agree on a value, that agreed-upon amount should be included in your divorce settlement agreement, and/or any separate “stipulation” (written agreement) you enter into regarding the sale of the home. Make sure you are certain that the value is fair, especially if your spouse is more knowledgeable about real estate.
When Spouses Disagree On The Home Value
If there is any disagreement over the value of the home, or if you have any misgivings about your spouse’s proposed home value, you should hire a professional real estate appraiser who can give you a reliable valuation. A professional appraiser may charge between $300-$400 (depending on the locale), but this fee may be well worth it, especially when you consider that judges are very likely to accept a certified appraiser’s valuation. If you and your spouse are both unsure of the value but still capable of working together, you may want to select a joint appraiser (someone you hire together) and split the costs of the appraisal fee. This will save you time and money.
If the two of you cannot agree on an appraiser, you may each end up hiring your own appraiser and submitting competing appraisal reports to the court. In this case, a judge will decide which value seems most reliable.
How Do I Determine the Exact Mortgage Balance?
This is the easy part. You can get a “payoff” amount from the lender (bank or institution that holds your mortgage). Don’t forget to include any second mortgages, equity lines of credit, or other encumbrances (debts against the home) such as any liens.
How Do I Determine My Share Of The Equity?
The exact amount of your share in the home equity will depend on your state’s laws, your judge, and your ability to negotiate. Factors vary, but may include:
• whether the house is a premarital asset (meaning whether you or your spouse purchased the home before the marriage with separate funds)
• whether the home (or the home equity) is covered by a prenuptial agreement
• whether you made any separate property or community property contributions to the home during the marriage (for example, whether you made payments toward the mortgage, property taxes and/or improvements, or whether you provided any physical labor toward improving the home), and
• whether you live in a community property or equitable distribution state.
How to Remove a Name from a Mortgage without Refinancing
Divorcing spouses wondering how to keep a house in a divorce may mistakenly believe that if the divorce decree awards the home (and outstanding mortgage balance) to one spouse, they can simply have the other spouse’s name taken off the mortgage. But a divorce decree doesn’t have the power to nullify your mortgage contract. However, there may be a way to take a name off a mortgage without refinancing — if you can qualify for a mortgage assumption after divorce.
When you assume a home loan, you take over the interest rate, monthly payments and loan term of an existing mortgage. If you and your spouse decide that one of you will be assuming the mortgage after divorce, check with your lender about whether the other spouse is still liable for the loan. This is especially important if the spouse keeping the home fails to maintain on-time payments. If the other person still has the mortgage listed on their credit report, they will be negatively affected by any late mortgage payments their former spouse makes.
What Happens If The House Isn’t In My Name?
It depends on whether you live in a “community property” state or an “equitable distribution” state. If you live in one of these states and you or your spouse individually purchased the home you lived in as a couple after you married, each spouse owns a 50% share of the home at the time of divorce even though only one spouse’s name is on the house deed and title. The 50-50 split generally applies to all property both spouses acquired over the course of the marriage. Any property you acquired separately before the marriage or after the divorce or separation still belongs only to you. For all other states that recognize equitable distribution, a divorce judge will fairly divide any property, including a home that the couple acquired during the marriage. Keep in mind that fairly doesn’t always mean equally in other words, there might not be a 50-50 split. If one spouse purchased the home while single and the other spouse moved in after getting married, for example, the house solely belongs to the spouse who bought the home.
When Should I Refinance My House When Filing For Divorce?
Option 1: Refinancing Before Filing For Divorce
Starting the refinance process before the divorce is filed is by far the quickest and easiest path. This is because, when you talk to your mortgage lender about refinancing, they will ask you your marital status. If you refinance before you file, you report that you’re still married, and then removing one of the spouses from the mortgage loan is much easier. After the divorce is finalized, you will still have to perform a Quitclaim to remove your spouse from the title, but the refinancing will already be taken care of. If you already filed for divorce, the process gets a little more complicated.
Option 2: Refinancing While Separated
If you refinance after filing for divorce, you will have to report to the mortgage lender that you and your spouse are separated. Unlike refinancing beforehand, you will have to wait until you have a written agreement between you and your soon-to-be ex-spouse detailing how much one party will be paying the other if anything. This process happens during the divorce proceedings, but it’s not quick. Until this written agreement is official, lenders will not be able to help you, since they can’t know for sure what your monthly debts will be. Oftentimes, you can get this agreement before the divorce is final, but you’re still looking at several months before you’ll be able to refinance.
Option 3: Refinancing After Finalizing The Divorce
The last option for refinancing by divorce would be after the divorce is finalized. In many divorces, one of the parties will have to pay alimony, maintenance or child support. To a mortgage lender, these payments are viewed as a monthly obligation, similar to a car payment. When trying to refinance, this will be included in your debt-to-income (DTI) ratio, which affects your new rates. The process becomes more complicated when the receiving party of the alimony or child support wants to use that money to stay in the home. This can be done, but it’s not automatic. There is a required six-month period to ensure the party is actually receiving the alimony or child support before a mortgage lender can include that as income when calculating DTI.
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It’s not a matter of if, it’s a matter of when. Legal problems come to everyone. Whether it’s your son who gets in a car wreck, your uncle who loses his job and needs to file for bankruptcy, your sister’s brother who’s getting divorced, or a grandparent that passes away without a will -all of us have legal issues and questions that arise. So when you have a law question, call Ascent Law for your free consultation (801) 676-5506. We want to help you!
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