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What Happens to Your Mortgage Liability during Divorce

— March 24, 2017

Having a mortgage as a divorcing couple will be your biggest liability. Depending on any pre-nuptial agreements and settlements, traditional divorces split assets equally between the two divorcing spouses. However, debts and liabilities are also split equally. This is true of the home and also true of the mortgage attached to it. Therefore it is vital to get off on the right financial footing by amicably deciding how to deal with this liability and build for two, independent futures.

The Divorce and Mortgage Landscapes in 2017

The United States continues to have one of the highest rates of divorce in the world. In fact, it ranks 6th overall. Furthermore, close to half of first time marriages (41%) end in divorce while that number rises to 60% of second marriages and 73% of third marriages. As a growing trend, older couples, so-called gray divorces, are on the rise especially. Divorces naturally have a profound effect on the property market because one couple in one home becomes two individuals in two homes.

The property market, especially the mortgage market, is on the whole recovering slowly from the foreclosure crisis of 2008 which saw many people lose their homes. Since the crisis, lending rules have tightened and divorcing couples might find their mortgage options more limiting than if they’d divorced prior to 2008. That being said, there are signs that the market, including lending rates, may be on the up.

Scrabble tiles vertically spelling out home and horizontally spelling mortgage
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Financial Planning During a Divorce

Planning, as a soon to be ex-couple, is vital. As with many other stages of life, knowing your incomes and expenditures, and dealing with debts and roadblocks is important. Neither part of a couple is going to be truly independent while a mortgage is hanging around their necks. Rather than leave it to a judge, it is perhaps best to sit down and have a frank but realistic discussion about each other’s finances, the home, and which scenario best fits. There are options out there for divorcing couples to keep or sell the home regardless of their situation. Here’s a few:

Selling the Home: The best option is to sell the home, pay off the mortgage and split any other income from the sale 50/50.

One Partner takes on the Mortgage: Quite often, one or both of the spouses wants to hold on to the property. It is certainly worth discussing if one is in a financial position to take over the mortgage and therefore, ownership of the whole house. This will require refinancing with just one person’s income.

Utilizing a Quitclaim Deed: If one partner wishes to take over the mortgage, but cannot afford to refinance, then it is possible for the other spouse to sign a quitclaim deed. This deed forfeits one partner’s claims to the property and any use of it or profit from its sale. However, the signee is still liable along with the other spouse for any missed mortgage payments. This mostly benefits the person not signing the deed.

A Short Sale: If the value of the mortgage is greater than the value of the house things get problematic. In a short sale, the mortgage lender agrees to accept a lower value for the house in exchange for cancelling the debt. However, this can impact both spouses’ taxes and credit ratings.

Renting Out the House: In a good rental market, the house could be rented out to another family or divided into more lucrative apartments. The added benefit is that rental income should exceed mortgage payments. While some of the money will have to go into maintenance and fees to letting agents, there is still profit to be divided between both spouses.

Cohabitation: Perhaps the worst possible idea emotionally, but it saves money. It might be possible to effectively divide the house into two apartments (upstairs and downstairs) or separate suites with a communal kitchen. This is usually a short term solution as most couples are divorcing for a good reason.

Post-Divorce Mortgages

Those married before 2008 will now find their chances of getting a new mortgage for their post-divorce life a lot more difficult than prior to 2008. As noted above, the response of the lending industry in 2008 during the financial crisis and the foreclosure crisis was to tighten regulations on new mortgages. If the house has been sold or rented out and new properties are needed, both members of the former marriage will have raised thresholds for new mortgage applications including higher income demands, larger deposit requirements, and stricter financial terms and conditions.

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