For homeowners going through a divorce, there are several ways to refinance a mortgage that leave both parties happy.
One of the many major decisions to make during a divorce is what to do with the house. Refinancing the mortgage is an option often considered by separating couples, but you might be wondering, “What happens if I can’t refinance after divorce?”
There are several other ways you can keep the house and negotiate new loan terms, even without refinancing. We spoke with a mortgage broker to explain the options available to people in these situations and how you can refinance after a divorce if you and your ex-spouse are able to reach an amicable agreement.
What Happens if I Can’t Refinance After Divorce?
If you're unable to refinance your mortgage after a divorce, you may face some challenging financial and legal situations. The most immediate concern is that both you and your ex-spouse remain legally responsible for the mortgage payments, regardless of who lives in the home or what your divorce agreement states.
This means that if one party fails to make payments, both credit scores could be negatively impacted, and you could risk foreclosure. Additionally, the debt will continue to appear on both credit reports, potentially making it difficult for either party to qualify for new loans or credit.
“Most of the time, the home was purchased with qualifying on two incomes,” says Reed Letson, owner of Elevation Mortgage. “During a divorce, you will only have one income, which makes it a lot harder to qualify.”
To address this situation, you have several options to consider:
- Explore alternative refinancing options, such as FHA loans or non-traditional lenders
- Sell the home and split the proceeds, which can help both parties move on financially
- Consider a loan assumption, where one spouse takes over the existing mortgage. This can be done by asking your lender for a release of liability, though some banks may not grant this request even if you’re able to pay the mortgage by yourself.
- Negotiate with your ex-spouse to continue the current arrangement while working to improve your financial situation for a future refinance attempt
- Find a cosigner to reduce your debt-to-income ratio
In any case, it's crucial to communicate openly with your ex-spouse and possibly seek legal and financial advice to protect your interests and find the best solution for your circumstances.
“One thing to remember is that the divorce documents may stipulate how much time you have to get the current loan out of your partner's name or they could force a sale,” Letson adds. “Remember to stay calm and level headed during these proceedings.”
Why Consider Refinancing Your Mortgage after Divorce?
You might consider several reasons for refinancing your mortgage regardless of other personal factors in your life. After divorce, refinancing can be a good option for many couples for a variety of reasons.
Lower Interest Rates
One of the main reasons to consider refinancing a mortgage is to get a mortgage with a lower interest rate. The interest rate on a new mortgage could be lower because rates have fallen since the original mortgage was taken out. You might also qualify for a lower interest rate if your financial situation and credit score have improved since taking out the original mortgage.
Change Loan Terms
Refinancing can help you get home loan terms that might be better for your current situation. By refinancing, you’ll have the option to choose an adjustable-rate mortgage or a fixed-rate mortgage, which can be attractive if you don’t like the terms of your original mortgage. It could allow you to extend your repayment period, making monthly mortgage payments lower.
Remove Ex-Spouse From Mortgage
For couples going through divorce, refinancing can allow you to remove one spouse from the mortgage. By refinancing in only one spouse’s name, that person will have the sole responsibility for the mortgage and the property.
How to Refinance Your Mortgage After Divorce
If you’ve decided that refinancing is the right decision for you based on your financial goals and situation, these are the steps you need to follow for a successful refinance.
1. Gather All Necessary Financial Documents
You’ll need to have financial documents ready so you can use them during the mortgage application process, including income statements, bank statements and tax returns.
Your mortgage lender will need to review these documents to assess your current financial situation.
2. Find a Mortgage Lender
The next step is to start looking for a mortgage lender. You can start by seeing what refinance options your current mortgage lender offers. You should also research other mortgage refinance lenders and compare your options to find the refinancing terms that work best for your situation.
3. Review and Compare Refinance Offers
Once you have a few mortgage lenders picked out, you can begin to apply for mortgage refinancing preapprovals. You can then compare the rates and terms of your preapproval offers to determine which mortgage lender you want to work with.
4. Attend the Closing
After you’ve selected a refinancing offer, you can schedule a closing with your lender to finalize the process. At the closing, you’ll need to review the lender’s documents to ensure that all the terms are what you expected. Then, you’ll sign the documents and enter into the terms of your new mortgage.
5. Update Homeowner's Insurance and Other Relevant Information
When you refinance, you’ll have to make sure that you update other important pieces of information as well. You’ll need to reach out to your homeowner’s insurance provider to let them know about the refinance and changes to the names and contact details that should be attached to the policy. Additionally, you’ll need to make sure that you update your home’s title to ensure that only the appropriate parties are listed.
The Bottom Line
- Refinancing after a divorce can be a smart financial move to remove an ex-spouse from a mortgage and better manage expenses.
- Understanding the terms of your divorce settlement is crucial in determining who will keep the house and who will be responsible for the mortgage.
- Factors to consider when refinancing after a divorce include credit score, income and debt-to-income ratio.
Why You Should Trust Us
Benzinga has offered investment and mortgage advice to more than one million people. Our experts include financial professionals and homeowners, such as Anthony O’Reilly, the writer of this piece. Anthony is a former journalist who has won awards for his coverage of the New York City economy. He has navigated tricky real estate markets in New York, Northern Virginia and North Carolina. He has also dealt with selling a home after a divorce.
For this story, we worked with Reed Letson, the owner of Elevation Mortgage, a mortgage lender in Colorado and Florida.
FAQ
Can a bank force you to refinance after a divorce?
No, a bank cannot force you to refinance after a divorce. That said, refinancing after a divorce may be a good idea, depending on who’s keeping the house and what their financial situation looks like.
How can I keep my house without refinancing after divorce?
If you’re looking to keep your house after divorce, here are a few options:
Sell the home and evenly split the proceeds
Have the ex-spouse receive a release of liability (not available at all banks)
Work with your ex-spouse to have them continue payments until a later time
Get a cosigner to reduce your debt-to-income ratio
How do I remove my ex-spouse from my mortgage without refinancing?
You may be able to get a release of liability, which would excuse your ex-spouse from any financial responsibility related to the house. However, many banks don’t allow this, and it’s up to the lender’s discretion.
Sources
- Reed Letson, owner of Elevation Mortgage
About Anthony O'Reilly
Anthony O’Reilly is an updates editor for Benzinga. He’s won numerous journalism awards for his coverage of the New York City economy and Long Island school district budgets.