Divorce is a shattering and demanding experience for many couples. It doesn’t just take a mental toll; it becomes that much messier when they share a mortgage.
Moving away physically doesn’t put a full stop to your financial liabilities. Your commitments to your spouse might have ended, but your mortgage commitment still stands. Hence, it is important to seek answers to several questions like ownership, liabilities, and how to handle mortgages after separation.
Some couples decide to sell their homes and split the proceedings for a clean settlement. However, if a partner decides to retain the house, a spousal buyout program and refinancing are more viable options.
In Canada, several reputed lenders such as Alpine Credits offer a seamless spousal buyout program. They work with you to offer you maximum benefit out of available options and avoid any sort of conflicts or surprises that might arise in the near future.
How does divorce affect a mortgage?
There are three distinct scenarios regarding your mortgage when a couple decides to part ways.
- First, most couples prefer to sell the property and divide the money.
- Second, one of the partners buys the home and thus, gets the partner’s name removed.
- Third, one partner stays in the home by “buying out” the mortgage of the other partner.
These possible scenarios entail different processes and risks, especially the third case.
Best ways to handle your mortgage after a divorce
There can be multiple options to choose from while settling the mortgage debate after a divorce. Let us understand in detail the right ways and your options to manage home loans after a divorce.
1. Refinance the mortgage
It is the best option to manage a mortgage when one partner earns enough to pay the home loan on their own. For instance, partner A qualifies for refinancing the mortgage and owning the property in their name. This way, the other partner B is freed from any future payments.
However, the title needs to be updated, showcasing only the new owner’s name. Otherwise, partner B could benefit from the sale and equity of the property.
When partner B signs a quitclaim deed to stop any future claims on the property, partner A becomes the only owner. Partner A is now solely responsible for the monthly amortization. They are free to choose a mortgage type suiting their financial situation and ability to make payments promptly.
2. Sell the property
After refinancing the mortgage, selling off the property is the most reliable option that promises to safeguard both parties from the risks of continuing the shared home loan.
All you need to do is pay off the loan balance and divide the proceeds as part of the divorce settlement. However, the challenge associated with this is that now you both need to find a new place to live.
Currently, with low interest rates, you can consider getting qualified for a new mortgage for buying your new home. If you are receiving alimony checks as part of the divorce settlement, you can present them as a valid income source to qualify for a new mortgage to buy a new home.
3. Loan assumption
Another popular way to handle a mortgage is when one partner takes full responsibility for the home loan. Similar to refinancing, partner A will be the sole borrower in this case. Whereas partner B is relieved from any future liabilities.
This solution becomes even more beneficial than the refinance option when the assumable interest rates are low compared to the present market rates. The closing rates related to mortgage assumptions are lower too.
The only downside of this solution is that partner A needs to pay off a substantial amount as compensation to partner B for their equity share. Remember, not all mortgages are assumable.
Surprisingly, most home loans made after 2008 don’t have this assumable feature. Thus, call a reliable lender, ask for a copy of the original promissory note, and check out whether or not your mortgage is assumable.
4. Retain the original home loan
There are scenarios when the couples aren’t able to refinance or sell off the property. Either their incomes aren’t enough or the one partner wants to continue living in the same home with the kids.
During such times, the mortgage payment terms are written in the divorce decree issued by the court.
However, the creditor and debt collector do not honour these divorce decrees. Additionally, when the court orders an ex-spouse to pay off a shared credit obligation to which they fail, it is your credit that suffers.
Thus, choose to retain your original home loan only when you trust your ex-spouse completely. Despite the friendly or affectionate relationship, either one or both partners can face the inability to make timely payments. This makes the divorce settlement inoperable. Also, the credit scores of both parties see a downfall.
5. Other Considerations
To safeguard each other’s interests, several factors shall be taken into consideration. If you are seeking a divorce that includes foreclosure as well, consulting a licensed attorney is the best option for you.
The divorce decree puts up a time limit on the attempts made by one partner to seek advantages of available options. For instance, when one partner is not able to remove another from the home loan during one year after the divorce, the provision could require the home to be sold off.
Hope for the best but prepare for the worst
There isn’t any single correct answer to manage your mortgage after a divorce. The partners’ goal should be to arrive at the final agreement that is beneficial and acceptable for both partners.
When you choose the right available solution, it is possible to part ways, yet, both content with the outcomes.
Remember, none of this is simple. Therefore, deciding on what to do with a home is exhausting both financially and emotionally. But, the couples who agree to cooperate, negotiate, and face the inevitable, end up preventing legal battles that are costly and embittering.