Divorce and mortgages: How to handle a shared mortgage, buyouts, refinancing and qualifying on your own

Divorce brings a lot of financial decisions, and for homeowners, the mortgage is often one of the biggest.

When two people own a home and share a mortgage, deciding what happens next can feel overwhelming. One person may want to keep the house. The other may need to be bought out. Both may decide selling is the cleanest option. In some cases, one former spouse may need to refinance the mortgage into their name alone before moving forward.

The important thing to understand is that a divorce agreement and a mortgage are not the same thing. Even if a divorce decree says one former spouse is responsible for making the mortgage payments, both borrowers may remain legally responsible to the lender if both names are still on the loan. Divorce does not automatically remove someone from a mortgage.

That is why it is important to understand your options before making decisions about the home.

Start by separating the house from the mortgage

There are two separate issues involved when a couple owns a home:

Who owns the property?
Who is responsible for the mortgage?

These are related, but they are not the same thing.

For example, one spouse may sign over their ownership interest in the home to the other spouse. However, signing a deed or changing the title does not automatically remove that person’s responsibility for the mortgage.

If both former spouses remain borrowers on the existing mortgage, both may still be responsible for the debt. A divorce settlement generally does not change the lender’s rights under the original loan agreement.

This is one reason refinancing or formally assuming the mortgage can become an important part of the divorce process. (ConsumerFinance.gov)

Option 1: Sell the home and pay off the mortgage

For some couples, selling the home is the simplest solution.

When the home is sold, the proceeds typically go toward paying off the existing mortgage, closing costs, and any other applicable expenses. Any remaining proceeds are then divided according to the divorce agreement.

Selling may make sense when:

Neither person can comfortably afford the home alone
Both spouses want a fresh financial start
There is substantial equity to divide
One person wants to move and the other does not want to keep the home
Refinancing is not financially practical

Until the sale closes and the mortgage is paid off, however, both borrowers may remain responsible for making the mortgage payments.

This is why communication and a clear plan are important. A missed mortgage payment can potentially affect both borrowers’ credit.

Option 2: One spouse keeps the home

Sometimes, one spouse wants to remain in the home.

This can be especially important when children are involved or when staying in the home provides stability during an already difficult transition.

If one person keeps the house, there are several questions that need to be answered:

Can that person afford the mortgage payment alone?
Can they qualify for a new mortgage in their own name?
Is there enough equity to buy out the other spouse?
Does the existing mortgage need to be refinanced?
Could the existing mortgage potentially be assumed?

The answers depend on the couple’s financial situation, the type of existing mortgage, and the terms of the divorce agreement.

How a divorce mortgage buyout works

A mortgage buyout generally happens when one former spouse keeps the home and compensates the other spouse for their share of the equity.

For example, imagine a home is worth $500,000 and the remaining mortgage balance is $300,000. That leaves approximately $200,000 in equity before considering selling costs or other factors. If the former spouses are entitled to equal shares of the equity, the spouse keeping the home may need to compensate the other spouse for approximately half of the equity.

Every divorce settlement is different, so the actual amount of a buyout can depend on many factors.

The person keeping the home may need to refinance the existing mortgage to:

Pay off the existing joint mortgage
Remove the former spouse from the loan
Obtain funds needed for the agreed-upon buyout

For eligible conventional loans, Fannie Mae provides specific guidance for refinances involving the buyout of another owner’s interest following a divorce or dissolution. These transactions may be treated as limited cash-out refinances when applicable requirements are met. (FannieMae.com)

The borrower keeping the home must still qualify for the new mortgage based on the applicable underwriting requirements.

Refinancing to remove a former spouse from the mortgage

Refinancing is one of the most common ways to remove a former spouse from a joint mortgage.

When you refinance, the existing mortgage is generally paid off and replaced with a new loan. If the remaining homeowner qualifies independently, the new mortgage can be issued in that person’s name alone.

Mortgage Equity Partners specifically identifies removing a co-borrower as one reason homeowners may consider refinancing. This can include situations involving divorce.

Refinancing may help accomplish several goals at once:

Remove a former spouse from the mortgage
Establish a new loan in one person’s name
Change the loan term
Potentially change the interest rate
Potentially access equity, depending on the loan program and eligibility

However, refinancing is a new mortgage transaction. The remaining borrower must meet the qualification requirements for the new loan.

That means a person who previously qualified based on two incomes will need to determine whether they can now qualify based primarily on their own income and financial profile.

Could a cash-out refinance help with a buyout?

In some situations, a cash-out refinance may be part of the strategy for buying out a former spouse.

A cash-out refinance can replace an existing mortgage with a new, larger loan and receiving the difference between the new loan amount and the previous mortgage balance in cash, subject to equity, program guidelines, and borrower qualifications. However, a divorce-related buyout is not automatically the same as a standard cash-out refinance. Depending on the loan type and circumstances, a refinance used to buy out another owner’s interest may have different rules.

This is why it is important to discuss the details of the divorce agreement and property ownership with a mortgage professional before deciding which refinance strategy to pursue.

Refinancing options

A refinance may help an eligible homeowner replace a joint mortgage with a new mortgage in their own name. Depending on the homeowner’s goals, available equity, and qualifications, the conversation may also include options such as a conventional refinance or cash-out refinance.

The right option depends on several factors, including:

The current mortgage balance
The home’s value
Available equity
Credit history
Income
Monthly debt
The terms of the divorce settlement
The type of new mortgage being considered

A knowledgeable loan officer can review the mortgage side of the situation and help determine what financing options may be available.

What if you want to keep the current mortgage?

Refinancing is not always the only possibility. In certain situations, the spouse keeping the home may be able to explore assuming the existing mortgage.

An assumption allows an eligible person to take responsibility for an existing mortgage rather than replacing it with an entirely new loan. This can be particularly appealing if the existing mortgage has favorable terms.

Depending on the mortgage and circumstances, the person receiving the home may have the option to assume the existing mortgage and request a release of liability for the former spouse. The mortgage servicer should be contacted to determine eligibility and available options.

An assumable mortgage, or assumption, can allow an eligible borrower to take over an existing mortgage’s remaining balance and terms.

Not every mortgage is assumable, and an assumption does not automatically release the other borrower from responsibility. That last point is extremely important.

If your former spouse’s name remains on the mortgage, they may still have financial liability for the loan. The mortgage servicer should explain whether a release of liability is available and what qualification requirements apply.

Qualifying for a mortgage on your own after divorce

One of the biggest financial adjustments after divorce is moving from two incomes to one. Qualifying for a mortgage on your own may feel intimidating, but being divorced does not prevent you from applying for a mortgage independently.

Mortgage qualification is based on your financial qualifications and the applicable loan requirements. Factors can include:

Income
Credit history
Monthly debts
Assets
Down payment or available equity
Debt-to-income ratio
The type of mortgage

The Consumer Financial Protection Bureau notes that lenders cannot deny a mortgage application simply because of marital status. A borrower applying individually may qualify based on their own financial qualifications. (ConsumerFinance.gov)

The key is understanding your financial picture before beginning the process.

Your old mortgage could affect your ability to qualify for a new one

One of the most frustrating situations after divorce occurs when someone moves out of the marital home but remains on the mortgage. Even if a divorce agreement states that the former spouse will make the payments, your name may still appear on the loan.

This can affect your ability to qualify for a new mortgage because lenders may need to consider your responsibility for the existing debt, depending on the circumstances and loan guidelines.

The CFPB recommends checking your credit report to determine whether an old joint mortgage or other joint accounts are still active. If your former spouse keeps the home, refinancing the mortgage to remove your name can help create a clearer financial separation. (ConsumerFinance.gov)

This is another reason to speak with a mortgage professional early. Understanding how the existing mortgage affects your borrowing power can help you plan your next steps.

Do not make mortgage decisions without understanding the full picture

Divorce can create pressure to make quick decisions.

You may want to keep the family home. You may want to move on as quickly as possible. You may be worried about whether you can afford the mortgage by yourself. Those feelings are understandable.

But the mortgage decision should be based on more than simply whether you can make the current payment.

Before agreeing to keep a home, consider:

Can you qualify for a mortgage on your own?
Can you comfortably afford the payment, taxes, insurance, and maintenance?
How much equity is available?
Would refinancing change your monthly payment?
What would it cost to buy out your former spouse?
Is the current mortgage potentially assumable?
Will your former spouse be fully released from liability?
How will the existing mortgage affect your ability to buy another home?

A loan officer can help answer the mortgage questions, while a divorce attorney can help explain the legal implications of the divorce agreement and property settlement.

Get pre-approved before making your next move

If you expect to purchase a new home after divorce, consider speaking with a mortgage professional before you begin house hunting.

A pre-approval can help you understand what you may qualify for based on your individual financial situation.

It is especially helpful to get pre-approved if:

You are transitioning from two incomes to one
You still have an existing joint mortgage
You are receiving alimony or other qualifying income
You are planning to use proceeds from the sale of the marital home
You are buying a new home after your current home is sold

Knowing your potential mortgage options early can make it easier to plan your next chapter.

A fresh financial start may require a new mortgage strategy

There is no one-size-fits-all solution for divorce and mortgages.

Some former spouses sell the home and pay off the mortgage. Others negotiate a buyout. One spouse may refinance into their own name, while another may explore whether assuming the existing mortgage is possible. The right strategy depends on the property, the mortgage, the available equity, and both individuals’ financial situations.

Mortgage Equity Partners can help eligible borrowers explore refinancing and mortgage options when navigating a major life change. Whether your goal is to remove a co-borrower, refinance into your own name, access available equity, or qualify for a new home on your own, speaking with a local loan officer can help you better understand the mortgage side of your options.

Final thoughts

Divorce can be emotionally and financially complicated, and a shared mortgage often adds another layer of questions.

The most important thing to remember is that a divorce decree does not automatically remove someone from a mortgage. If you are still named on the loan, you may still have financial responsibility until the loan is paid off, refinanced, assumed with an appropriate release of liability, or otherwise resolved with the mortgage servicer.

Take the time to understand your options. Talk with your divorce attorney about the legal aspects of your property settlement and speak with a mortgage professional about the financing options available to you.

With the right plan, you can make informed decisions about your home, your mortgage, and your financial future. If you would like to learn more, reach out to one of our specialized loan officers or if you are ready to take the next step, start the pre-approval process today.