Prior to the burst of the housing bubble, any divorcing couple could easily get rid of the home they shared together, divide their equity and do with it what they would. But today, millions of mortgages are underwater and a huge liability. This can really complicate matters during divorce proceedings.
1 – Divorce Through the Mortgage Lender’s Eyes
The truth is that regardless of what has happened in a marriage, a divorcing couple who shares a home is still considered to be married according to their lender. Unless a couple can either refinance or sell their former home, both are liable for making mortgage payments.
Due to the condition of the current housing market, selling the home may not be a quick or feasible way to solve the issue. So many couples wonder if a refinance will do the trick. The answer is that it will, as long as the mortgage isn’t underwater, one spouse qualifies for the refinance and the other agrees to let the house go.
Experts agree that when considering the options surrounding a shared marital home in a divorce proceeding, couples should consider whether or not they would purchase the home if they were single. A spouse should also think about whether they can afford to keep the house. And even if they can, spouses may want to ask themselves whether or not they should keep the house.
2 – Consider Borrowing Amounts and Interest Rate
Thanks to “risk-based pricing”, it’s no longer possible for buyers to get the same interest rates across various down payment percentages. Therefore, the rate that is paid will depend on how much is borrowed as a percentage of the value of a home.
In addition, risk-based pricing will take your credit score into account. In cases where one spouse must buy the other out, it will have to be determined whether or not the spouse who is doing the buying out will save money on their mortgage by staying as close as possible to a certain loan-to-value ratio. Borrowing less may be an option if the rate differs significantly.
3 – Who Buys Out Whom?
These days, the spouse whose income can be verified and who has good credit will receive a better rate on the refinance of a home following a divorce. In cases where both spouses qualify, there is nothing left to do but negotiate how the property and assets can be equitably divided. For those spouses with non-verifiable income and/or poor credit, child support and alimony can both be counted as verifiable income.
4 – How to Refinance In a Divorce Situation
The person in the divorce who is moving will have to calculate how much equity they own if the amount of equity owned is not covered in the terms of the divorce settlement. This can be done by taking the home’s value and subtracting the amount outstanding on the mortgage. This will give you total equity, which can then be divided by two to get the amount owned by each person.
Next, experts recommend finding a lender by shopping for the best rates. Choosing a mortgage should involve the comparison of APR as well as interest rates. Considering APR will give a clearer picture of a mortgage’s total cost.
When applying for the new mortgage, the new loan amount should be enough to cover both your mortgage’s balance and the equity portion for your ex-spouse. Checking your divorce settlement for any deadlines by which a refinance must occur is a good idea. This way, you can notify your lender and ensure the refinance occurs on time.
A quitclaim deed will have to be completed by the ex-spouse. This will transfer ownership interest to the party taking over the mortgage. As well, any loan documents are to be signed only by the party who is taking the property.
Guest author Tony Donovan writes on a variety of topics, particularly related to the mortgage industry. He recommends www.refinancehomemortgageguide.com to help consumers weight their options on a refinance.