The economy has presented obstacles for homeowners seeking a reasonable mortgage. But divorce adds further complications for couples dealing with their marital home and obtaining a mortgage.
Mortgage options
Keeping the family’s home depends on many factors. These include whether the breakup was acrimonious, how the home was financed and titled, the amount of equity and the couple’s credit rating.
Couples with a joint mortgage may refinance the mortgage under one name. This releases the spouse whose name is coming off the loan from being responsible for the mortgage. The lender has the sole authority to remove a spouse’s name from the mortgage.
Leaving both names on the mortgage is co-ownership of the house. This can reduce the ability of the non-resident spouse to qualify for another loan because of the debt they are carrying.
However, if a spouse’s name is not removed from the title, usually through a quitclaim deed, they may benefit from the sale and equity in the home even though they did not make mortgage payments.
Spouses also must confront the reduction in income and assets that follow divorce, but which are important for obtaining the best mortgage rates. Post-mortgage rates also depend on the borrower’s income, debt, credit score and the market environment.
The spouse who receives spousal support may use that income to qualify for refinancing if the decree provides that they receive the support for at least three years. But the spouse paying spousal and child support reduces their chances for mortgage eligibility.
Sale
The divorce settlement may require the couple to sell the home and divide the proceeds if the spouse with possession does not meet a deadline to refinance the mortgage in their own name. Selling the home may be the best option if neither spouse can afford the mortgage and the costs associated with refinancing.
Considerations
When determining the fate of the marital home, spouses should consider their equity in the home and whether an appraisal is needed.
If the home is sold, each spouse can deduct up to $250,000 of gain from their taxable income. However, this applies only to their primary residence that they lived in for at least two of the last five years before its sale.
A spouse should also be cautious about taking a house that depreciated. Taxpayers cannot claim a tax loss on the sale of their principal residence.
A divorce settlement may address division of assets such as the couple’s home. Couples should try to seek a fair and reasonable decree.