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What to do with your mortgage debt after a divorce
If you’re recently divorced or separated and own your home, it may be time to think about refinancing.
There’s a lot to think about when managing your post-divorce finances. Further complicating the situation is what to do with joint assets like your home or other mortgage properties.
In general, you have a few options when divvying up your property assets:
- Sell the property and share the profits with your ex.
- Sell your share of the property to your ex.
- Refinance the mortgage for sole ownership of the home.
If you intend to take ownership of the family home, consider refinancing your mortgage to assume ownership of the property and also take financial responsibility for it.
Refinancing your mortgage to buy out your spouse
When one spouse wants to keep the family home, it’s common for that person to refinance the existing mortgage. Refinancing allows you to take your ex’s name off the loan, effectively taking on the financial responsibilities of purchasing it.
To refinance your home, you may need to provide to your lender:
- Records that show you have the money to pay out your ex if you don’t have enough equity in the home.
- Proof of an excellent history of repayment on your existing home loan.
- A recent property appraisal.
Note that depending on how long ago you originally purchased the home, you could face more strict — and lengthier approval times — given changes to lending conditions since the global economic crisis of 2008. Ask your lending professional for the specific parameters of your mortgage responsibilities before signing any paperwork.
Can I take possession of an existing mortgage?
If you don’t want to go through the process of refinancing, some lenders will consider allowing you to assume the existing mortgage outright. This means that you’d take over the mortgage and its payments. But you may need to provide proof that you are financially able to cover the monthly mortgage.
Seek the help of a lending professional before deciding on this option.
How important is my home’s current value when refinancing?
If your lender estimates your property value at a lower figure than anticipated, they could decline the loan. In that case, you may be prevented from dividing the property successfully.
Unfortunately, there is no way to control how a lender will estimate your property value. Before you submit your refinancing application, ask an experienced mortgage broker if they can obtain different estimates from various lenders. With this information, you can apply with the lender that has the most satisfactory estimation for your property. But be aware that requesting too many credit inquiries could possibly damage your credit score, making it more difficult to qualify for a loan.
How much am I able to borrow?
If your history of repayment has been excellent and you meet your lender’s guidelines, it could be possible to get a loan for 95% of the value of your property. You will have to pay private mortgage insurance (PMI) if you borrow more than 80% of the value of your property.
How to remove someone’s name from a property deed
Can I use child support payments as income to get a home loan?
While some lenders will accept your child support benefit as income when applying for a mortgage, others consider child support payments an unreliable source of income.
Acceptance of child support as income could further depend on:
- The age of your dependents. Most lenders require proof that you will be receiving child support for at least three years. That means if your children are 15 or older, your child support payments may not be accepted as income.
- How long you’ve received child support. Lenders will typically request at least six months of child support statements.
You’ll need to speak to your lender or mortgage broker to find out whether your child support payments are acceptable income.
What if I’ve neglected loan repayments?
Amid the lengthy proceedings and emotional chaos that comes with divorce, it’s understandable that you could miss a payment or two on your mortgage. But if you plan to refinance or assume your existing mortgage, it’s a good idea to continue paying your share.
Skimping on payments doesn’t reflect well on your credit history and could make it harder for you to apply for refinancing and complete the settlement. Most mortgage lenders won’t refinance a home loan unless the borrower can show flawless repayments for six consecutive months.
Will I have to pay taxes to transfer ownership?
When transferring ownership of a property, it’s likely that both you and your spouse will pay a transfer tax. The tax you’re charged will depend on your county, but it tends to be 1% of the home’s purchase price. Keep in mind that the county could reassess the value of your property at the time of transfer, resulting in higher property taxes for the spouse taking ownership of the home.
To learn the specific tax you’ll be responsible for, consult your lender or mortgage broker.
How to transfer home ownership after a divorce
Seek the assistance of a professional
As with all real estate decisions, talk to your family law attorney, a tax professional or another expert to determine your specific responsibilities when assuming financial responsibility for your property during or after your divorce.
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