Aside from the complex emotions and legalities involved in a divorce, there’s the couple’s financial situation to think of. Dividing property and debts, e.g. your house, is a point of contention in itself. How do you break up your mortgage after your marriage is over?
1. Sell the House
This is the easiest course of action to take. To sell your house at a good price, its value should be more than your loan balance. This way the sales proceeds can cover the loan and the sale costs and you get to keep whatever funds remaining.
But if your outstanding loan balance is substantial and exceeds that of your house’s value as appraised, the sale price won’t be enough to finish off the loan. That means you have to produce funds to cover the difference.
In cases where your financial circumstances are deteriorating and are experiencing hardship, you may be able to convince your lender to conduct a short sale. Here, the lender will agree to sell the property short, i.e. consider the proceeds from the sale to completely payoff the loan.
A short sale may save you from further mortgage-related discussions but your credit scores will suffer as a result. You also have to ensure that the lender will release you from any and all liability arising from the mortgage after the short sale.
2. Refinance the Mortgage
A mortgage refinance will enable you to remove your name or your spouse’s from the mortgage note. Between the two of you, decide who stays in the house and keep the loan and who has to leave and be discharged of the payment responsibility.
Whoever keeps the house after the divorce must have sufficient income and credit to be approved for the refinance. The property itself must have adequate equity, generally 20% at the very least. You can’t refinance if your mortgage is underwater.
3. Release of Liability
If either of you can’t qualify for a refinance or that the transaction proves too costly, there’s the release of liability option.
At your request, the lender removes your ex-spouse’s name and leaves your name as the sole borrower to the loan. This means you are solely responsible for repaying the loan.
Do note that your lender may not offer a mortgage liability release. And if they do, they’ll run a credit check on you to ensure that you’ve been good in paying your mortgage and that you can afford to keep the mortgage on your own.
4. Loan Assumption
Under a loan assumption, one spouse takes over the repayment of the mortgage with the lender’s consent of course.
Loan assumptions, like a release of liability, are far and between. And if your lender agrees to the assumption, there’s an income standard to meet.