If your marriage is on the rocks, should you refinance before divorce or wait until after?
By Tracy Achen, Divorce Coach
For couples who own property, this is something to consider. Deciding who will keep the house and what to do with the mortgage are two of the biggest decisions you will make during divorce.
It's important to note that if both spouses’ names are on the mortgage, they are jointly responsible for repaying the loan, regardless of their marital status. A divorce decree doesn't impact the mortgage lender. In the event the mortgage goes into default, both spouses will be equally on the hook.
The best way to prevent this scenario from happening is to either sell the house or refinance the mortgage. Below are some tips to help guide you during the process.
The first step in the process is deciding whether or not you will be selling the house or keeping it. If you and your spouse are able to get along and decide to sell the house, it will make disentangling your financial lives easier. If you decide to keep the house, you will then have to decide which of you will be taking on sole ownership of the property. This is a huge decision for both you and your ex’s future and should not be taken lightly.
When deciding who should keep the house, it is crucial that you remove any emotional attachment you have to the house and think objectively. Remember there is no ‘we’ anymore when it comes to finances after a divorce. Whoever takes on home ownership will be solely responsible and should be in good financial standing to meet those expenses themselves. The last thing you want is to start your post-divorce life buried in a mortgage that you can no longer afford on your own.
If you ultimately decide not to take ownership of the house, you will then have to explore new housing options. Now is the time to decide whether you will be renting or buying. If you are in a good financial position to purchase a new house after your divorce, you will need to consider how much house you can afford before moving on with the home buying process. There are many factors to consider such as your monthly expenses as well as your debt to income ratio, so make sure that you consult a professional before making any decisions. Taking on a mortgage by yourself is a huge undertaking, so you will want to be as prepared as possible.
There is no one size fits all answer for when you should refinance your mortgage in anticipation of a divorce. Everyone's situation and goals are different, so you will need to weigh out your options and find the right fit for you and your ex. Whether you decide to refinance before divorce or afterwards, each comes with its own advantages and disadvantages.
Refinancing in both spouses names before divorce allows you to take advantage of having dual incomes and a lower debt to income ratio, as well as a typically higher credit score. All of these factors can help you achieve a lower interest rate on your new mortgage overall, which will lower your monthly payments. If you and your spouse are able to cooperate and agree that it’s best to go your separate ways, the extra money from refinancing can be used to pay off other martial debts or even to pay for the divorce itself.
If you choose to jointly refinance before your divorce, you will want to make sure that this is the correct decision for both you and your ex in order to avoid any disagreements later on. You’ll need to decide what will happen to the house after your divorce and how you can ensure mortgages payments will continue to be made.
The downside to jointly refinancing is that both parties will still technically be responsible for the payments as they are both still on the mortgage. It is important to note that this continuing mortgage responsibility (even if you no longer live in the marital home) can hinder your ability to qualify for a new mortgage after your divorce. For these reasons, it's common for a divorce decree to include a clause that the house be refinanced within a certain amount of time after the divorce is finalized.
Another downside to refinancing before your divorce is the real possibility of converting separate property into joint ownership property. Say for example, you have a house that you bought before you got married and the deed is solely in your name. Then you decide to refinance the mortgage (possibly to get a lower interest rate or remodel the house) before you file for a divorce.
Mortgage lenders generally want both spouses on the mortgage because this can help insure the loan will be paid off. And they will often insist that both spouses’ names appear on the deed. The result of adding a spouse’s name to non-marital property is that it converts it to a marital asset, which is then divisible in a divorce. When you are facing a divorce, this is the last thing you want.
You may be wondering if it is possible to refinance the mortgage solely in your name before a divorce is ever initiated. There are times when this is possible if you have sufficient income, a fair amount of equity in the house, and a good credit score.
In common law states (all states except AZ, CA, ID, LA, NV, NM, TX, WA and WI) you can take on individual debt without using any of your spouse’s information. If you have the financial means to qualify for a mortgage solely in your name, then this can make splitting the marital estate easier during a divorce.
For this to work, you’ll need a good enough credit score and income to qualify for the mortgage. And you’ll also need the cooperation of your spouse because they will likely have to relinquish their rights to the house, either before or after the divorce. Lenders want the deed in the borrowers name because the house acts as security for the mortgage. Lenders don’t want to lose their security interest due to a borrower’s divorce.
It gets a little more murky is you reside in a community property state such as Arizona, California, Idaho, Louisiana, Nevada, New Mexico, Texas, Washington and Wisconsin. In these states, assets and debts acquired during the marriage are considered to be joint property and joint liability. It doesn’t matter which spouse’s name appears on the deed or mortgage.
If you are attempting to solely refinance before divorce in one of the community property states, you’ll most likely have addition paperwork to complete, even if your spouse isn’t currently on the deed. This paperwork serves as an acknowledgment that your spouse doesn’t have any claim to the property. For example, your spouse might need to sign a sole and separate property agreement relinquishing his rights to the property.
Overall, if you and your spouse can agree on who will be keeping the house, it makes sense to refinance the mortgage into that person’s name before the divorce. Once again, it’s a good idea to consult with an attorney or legal expert to make sure this is the best way to proceed in your state.
Refinancing after your divorce is finalized allows you to remove your ex's name from the mortgage in a much more streamlined way. This is best if you wish to take on full ownership of the home. Plus, the divorce decree outlines what must happen with the house and mortgage. This allows for enforcement of the court order if the deed isn’t transferred or the mortgage isn’t refinanced within a reasonable amount of time.
The downside here is that the new mortgage and interest rates will be based solely on your own finances. Spousal alimony and child support can be used as a source of income to qualify for a loan, but you’ll be better off getting a loan based on your income alone. There are instances where ex-spouses quit paying their support obligations, so mortgage lenders often require proof of that support payments have been paid for at least six months before including this information in the loan approval process.
Before taking on the burden of a mortgage by yourself, you will want to know how a divorce can affect your credit, as that is a huge factor when it comes to refinancing. If you are not in the greatest place financially after your divorce, then you could end up paying more interest in the long run and increasing your overall monthly payment.
Going through a divorce is never going to be an easy process, especially when you and your ex own a home together. Taking the time to plan out your goals and finances will make all the difference during this process. Make sure that you are making the best decisions for yourself, as well as your financial future, to help you with the next part of your life.