Divorce and Mortgages
Life has many unexpected twists and turns and no matter how much we plan sometimes it just doesn’t work out as we thought it would. The splitting of a partnership is never something that we see coming or plan for, so when it happens it’s easy to be caught off guard. This begs the question for homeowners going through a divorce – what happens to your mortgage? Divorce mortgages don’t have to be overly complicated. There are 3 options ex-spouses can take to divide their assets.
Sell The Home
This is the most common option for partners going through a separation. Not only do they not want those shared memories, but it can be difficult to qualify for a home loan that was previously based on two people’s incomes, and now has to be paid off by a single income. Selling the home is a great way to get rid of the financial responsibility as well as the emotional ties, plus both parties will receive half the earnings from the sale, or if you have other agreements with lawyers then you divide the earning as contracted.
Remove A Name From The Mortgage
Let’s start by saying this is not a common option. Lenders very rarely are willing to let someone off the hook for a loan of any kind, especially when it will increase the bank’s risk. When you apply for a mortgage with a partner (or anyone for that matter, even a co-signer) both parties are 100% responsible for the loan; it is not a joint loan where either party takes 50% of the responsibility. So, in the case that one of the signers cannot pay, the other half is still 100% responsible.
Put Into Practice...
Let’s say Person A is planning on retaining the home and Person B would like to have their name taken off the mortgage agreement. To do this, Person A must be able to qualify for the full amount of the remaining mortgage. This will likely require a refinance which means Person A will be charged refinancing costs and fees. Person B must go to their lawyer to be taken off of the land title, and file a quitclaim.
Only once a lawyer removes a name from the land title will that person be no longer responsible for any mortgage payments.
Co-owners can agree to have one of the parties to buyout the other. The one retaining the home (Person A) will have to buyout the equity of the co-owner (Person B).
Let's Look At Some Numbers...
The mortgage was for $600,000, and you have a remaining balance of $450,000.
The joint equity is $150,000, however in most cases that is split evenly between the co-owners.
$150,000 ÷ 2 = $75,000
Therefore, Person A will need to give Person B $75,000 to buy them out. In most cases, this requires a refinance of the mortgage for Person A.
There is no option that is a one-size-fits-all solution. Your situation is unique to you, so it’s always best to consult your financial advisor before moving forward with any major decisions. This blog is simply to layout some general options so you can get an idea of what can happen.
Owning a home is a huge investment which you already know, so take your time and evaluate your options. It’s human nature to want to remove yourself from an uncomfortable situation as soon as possible, but the last thing you should do is rush into a solution that may not be the right one. Take your time, examine your options, and remember that everything will work out in the end.
Let's Go For A Coffee!
I’m always here to answer any questions you have regarding your mortgage. If you’d like to run some ideas past a professional, reach out! I’d be happy to go for a coffee with you.