At a Glance
Casual divorce conversations from outside observers often center around the “who gets the house” question. The parties involved in the actual divorce proceedings know that it’s not that simple. In most cases, neither party owns the house outright. There’s a mortgage on it and the deed is in the bank’s hands. The liability of that mortgage is what needs to be settled.
Refinancing after divorce is sticky. Doing it while the divorce is in progress is even worse. It’s best to settle these matters before any legal actions take place. This can be done through refinancing the mortgage or maybe even selling the house outright and splitting the profits. That choice is most often dependent upon the amicability of the separation.
Keeping the Home and Refinancing
Mortgage refinancing is the best option if one spouse wants to stay in the house and take on the liability of the mortgage. This usually involves a buyout to pay off any earned equity the other spouse has in the property and a signed release of liability that takes their name off the title. The easiest time to do all this is before the divorce is filed.
Once legal action has been requested, refinancing becomes more complicated. There needs to be a written agreement between the two spouses that outlines who is responsible for what percentage of the household debt after divorce. Your attorneys can draw this up, but lenders are usually reluctant to accept that until the divorce is finalized.
Refinancing after the divorce is finalized adds another level of complexity, particularly if there are alimony or child support payments. The party responsible for paying those is required to report them to the lender as a liability. The receiving party can’t claim them as additional income until a six-month verification period has expired.
One thing to keep in mind when refinancing is that you want to pay off the mortgage before you retire. That becomes more difficult when you remove a second income that may have been contributing to mortgage payments. If you’ve built some equity in the house, you may want to sell it and downsize after the divorce is finalized.
Selling the House and Splitting the Proceeds
The best-case scenario for spouses who want to avoid the intricacies of refinancing is to sell the house before they file for divorce and split the proceeds. This will help preserve both credit scores and leave the two parties free and clear of any mortgage debt when they negotiate the divorce settlement. Obviously, an amicable relationship is necessary for this to work.
If ownership rights are contested or the two parties can’t cooperate without conflict, it’s best to leave things in the hands of the attorneys and the divorce court judge. The final judgement can require the sale of the house and outline the profit percentages to be awarded to both parties. This should not be viewed as punitive, since it protects everyone involved.
Frequently Asked Questions
Can you refinance a house after divorce?
Yes, you can refinance after divorce, but it’s more complicated than doing it before the divorce is filed, particularly if there are alimony and child support payments involved.
What happens when you refinance a house during a divorce?
The lender will want some type of legal documentation stating what the final financial obligations for both parties will be. Even then, they may not accept it. Most lenders prefer to wait until the divorce is finalized.
Does divorce affect refinancing?
Yes, it does. The financial situations of both parties involved in a divorce change after the divorce is finalized. The lender will take those changes into account.
What happens if I can’t refinance after divorce?
If you can’t refinance after divorce, you may need to sell your house and start fresh. The spouse you divorced will need to be on board with that if he or she is a liable party on the mortgage.