We love happily-ever-afters as much as the next person… but the unfortunate reality is that divorce happens, and it happens often. Did you know that until your divorce is finalized, you need the approval of your spouse in order to sell your current home or purchase a new one?
Dealing with the logistics of a shared home and mortgage can further complicate and drag out what is already an emotional and frustrating experience. With that in mind, we have curated a list of options and tips to help you make the best decision for your situation.
1. Keep everything the same
In other words, one spouse moves out and the other remains in the household, but both spouses are still on the mortgage. This is what usually happens by default, and it is notably the least desirable option. This is a risky route to take because if mortgage payments are missed then both of your credit scores will suffer.
Moreover, any missed mortgage payments on either of your behalf can make it extremely difficult to get another mortgage. It may be tempting to put off dealing with your finances and simply resort to keeping things as is; however, it is important to carefully consider the options that follow, as they will provide better financial stability going forward.
- Documents: none.
- Costs: several.
One option is for spouse A to remain on the mortgage and take out equity to buy out spouse B, a.k.a. spousal buyout.
While a typical refinance will only allow you to go up to 80% LTV (Loan-to-Value), if this isn’t enough equity you can go up to 95% LTV through an insurer when conducting a spousal buyout, which will grant you more equity to pay off your spouse.
As you might have anticipated, there is some paperwork involved. A private sale agreement would be required if you are going through an insurer for up to 95% LTV. This is treated like a purchase/sale between both parties. If you are the one keeping the property, you will want your spouse to sign a quitclaim deed, which thereby relinquishes their claim to the property.
If you are the one signing over the property to your spouse, you want to make sure that your name is no longer on the deed so that you are not held liable if there are any missed payments. If this option is pursued, you can also have your spouse sign a Deed of Trust to Secure Assumption –– this allows you to take back ownership of the house if your spouse defaults on the mortgage by failing to refinance.
Once the divorce is final, let your mortgage lender know that you have a security interest. Ensure that they have your current address so that you can be notified if missed payments occur.
- Documents: Private sale agreement, Quitclaim deed, Deed of Trust to Secure Assumption.
- Costs: Spousal buy-out cost/refinancing costs.
3. Assumption of Mortgage
In the event that you qualify for the mortgage on your own, you can choose to assume the mortgage in your name. No need to buy out your spouse. No need to refinance.
But again, there is the inevitable paperwork. If this is the route you opt for, you will need to sign an assumption agreement and a release/waiver of liability for your former spouse. You will also need documentation to prove that you can support the cost of the mortgage with your income alone.
Provided you meet the requirements, you should also be prepared to supply a divorce decree and the quitclaim deed. Note that there are a few assumption fees involved as well, but ultimately this will cost much less than refinancing.
- Documents: assumption agreement, release/waiver of liability, proof of income, divorce decree, quitclaim deed.
- Costs: assumption fees.
4. Sell the Property
Sometimes the simplest option is to sell the property, and both start fresh. If you choose this option, it is a good idea to note the selling price of your home for your records so that you know what your assets are worth for the divorce proceedings.
When it comes to costs, you should keep in mind that there could be a financial penalty for breaking the mortgage early. You can contact your lender to find out how much this will set you back. Additionally, when assessing the costs, you should factor in real estate fees and closing costs.
Finally, it is important to get pre-approved by the bank before you start looking for a new home. To give yourself the best chance of financing a new place on your own, be sure to keep your credit score in good standings.
- Documents: Keep record of the selling price, documents requested by bank for pre-approval.
- Costs: financial penalty for breaking mortgage early, real estate fees, closing costs.
Divorce is a trying and difficult time, but this is all the more reason to take control of your financial situation early to prevent future stress. Be proactive and make the decision that is right for you with the necessary knowledge and supports you require.