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Challenges Of Divorce And Your Mortgage

Challenges Of Divorce And Your Mortgage

Divorce may be a trying and stressful experience, especially when there are assets to divide, such as a home. What to do with the marital house is one of the most important decisions that a divorcing couple must make and trying to come to an agreement on a house and a mortgage might be a nightmare if the split was contentious. Divorcing couples’ options are influenced by a variety of factors, including how their property was financed and titled, whether one partner want to remain in the home, the amount of equity they have in the home, and their credit rating.

If both couples desire to stay in the marital house, deciding who will keep it can be difficult. Once the couple has decided who will receive the house after the divorce, they must ensure that the recipient will be able to afford to keep it. When making this determination, it’s a good idea to look at the big picture. Even if remaining at home appears to be a better option, it can have a long-term impact on both spouses’ aspirations.


Tax Implications

Working with a divorce lawyer who is familiar with tax law or tax difficulties is always a smart idea when navigating a divorce – even one that doesn’t involve selling a home. If a divorcing couple does decide to sell or is forced to sell, as part of a settlement or to buy out the other spouse’s stake, capital gains taxes may apply. There are also tax implications to alimony payments, which may impact a divorcing spouse’s ability to qualify for a new mortgage or refinancing the marital home’s mortgage. Alimony payments may also have a negative impact on the payer’s income and ability to obtain a mortgage.

Calculating The Value Of Your Home

It’s normal for a couple to split the equity according to their divorce agreement or to utilize it to pay off other debts they’ve accumulated together. Selling the home is the best method to accurately value it and calculate equity, this isn’t always possible or suitable. Getting a professional appraisal is the next best thing. However, there are situations when a couple cannot agree on the appraised worth. This can stymie progress and force you to spend additional time and money on attorneys and appraisers. If one of the spouses does not agree with the appraisal, one possible compromise is for each of them to acquire their own valuations and use the average of the two to calculate equity.

Selling Your Home

Sometimes, it’s just in the best interest of everyone involved to sell the home, pay off the mortgage, take their cut of the earnings and start fresh. In some cases, however, a divorcing couple may have no choice but to sell if they fail to meet a deadline to refinance the mortgage into one spouse’s name or if neither partner can afford the mortgage on their own. Couples should think about the costs of selling in addition to the mortgage balance. Realtor commissions, fees of sprucing up the property to make it more appealing to purchasers, real property transfer taxes, and capital gains taxes are examples of these.

Refinancing Your Home Loan

Refinancing a home loan into one spouse’s name relieves the other of accountability for the loan. If the couple’s home has equity, the spouse who wants to keep it could use a cash-out refinance to pay their ex-partner their half. In most cases, the spouse asking for the refinance can only use their own income and credit score to qualify. However, if they will receive alimony or spousal support, they can utilize that income to qualify for a refinance if the divorce decree indicates that they would receive alimony for at least three years.

Reimbursing Their Share

Assuming the house is valued at $300,000 and the couple owes $200,000 on the loan, if a divorcing couple have agreed to a 50/50 split and have $100,000 in equity, they will need $50,000 to buy out the other spouse’s part. One of the partners refinances into a $250,000 loan in their own name and utilizes the $50,000 cash payout to settle with their ex — but they must first make sure they qualify for the loan. If you want to keep the house but don’t have enough equity to perform a cash-out refinance or enough money to pay your ex’s half, a home equity loan could help. Some lenders will lend up to 95% of the home’s worth.

Removing A Name From The Loan

Only the lender has the authority to take one spouse’s name off the mortgage, and refinancing is usually the only method to get a spouse’s name off a mortgage. Additionally, the other divorcing spouse could still benefit from the home’s sale and equity if they’re not removed, so it’s critical to have the title changed to reflect ownership post-divorce. The non-resident spouse’s ability to qualify for another loan to buy their own property may be harmed if they remain on the mortgage. A mortgage, unlike a divorce order, is a legally binding contract independent of the divorce, so either spouse is still liable if they’re on the loan.

Keeping Your Credit Safe

Divorce is an emotional and sometimes tumultuous experience, but the worst thing divorcing couples can do is seek financial retribution. Taking a pessimistic approach to choosing what to do with a mortgage, or even more severe measures such as not paying bills out of spite, might harm both spouses’ credit and future lending alternatives. Closing joint accounts and opening new ones can help you protect your credit score, debt-to-income ratio, and other factors.

No matter what your decision is – sell, refinance, or buy out – make sure you have the correct people around you before making any final decisions about your home or mortgage during a divorce. A qualified divorce attorney, a financial planner, and a mortgage broker are key to navigating this next step in your life. Contact us for a personalized plan for your needs.

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