When a couple goes through a divorce, the marital home is one of the biggest assets, if not the biggest asset, in the marital estate. Although sometimes keeping the home is not the best financial decision (see my article on that subject), the majority of the time one of the spouses ends up keeping the marital home.
When the assets and debts are split in a divorce, the marital home has to be split as well. Obviously, you can’t “split” a house so like value is exchanged for the equity in the property. That money has to come from somewhere. Sometimes there are other assets and sometimes cash from equity in the home is used. (This article applies to ANY real property jointly held by spouses but for ease of discussion, I’ll be referring to the marital home.)
When there is a mortgage on the marital home in both spouses’ names, there are basically three choices that can be made when one spouse wants to keep the home, and each comes with its own complications:
Refinance the joint mortgage: The spouse that is not keeping the house should get their name off the mortgage so that they no longer have liability on the mortgage. The spouse keeping the home will have to qualify on their own for a new mortgage. That spouse’s credit may not be good enough to qualify for a new mortgage and if that spouse has not worked, he/she will have to create an income history (whether by working or by spousal support payments) which may take some time. An appraisal will have to be done which adds to the cost of refinancing. I recommend that once this decision is made, a mortgage broker be consulted right away.
Retain the original joint mortgage: The biggest problem presented by keeping the original mortgage is that both spouses remain liable for the mortgage and any default on the mortgage will cause financial and credit damage to both spouses. Banks don’t care what a settlement agreement says about who is responsible for paying the mortgage. If both spouses’ names are on the loan documents, both spouses are responsible. The spouses have to trust each other that the mortgage payments will be made. Sometimes, for instance, if there are teenage children and the house will only be kept for the 2-3 years it takes for them to graduate high school, the choice is made to retain the existing mortgage and then sell the home. The risk is worth the savings. If the joint mortgage is kept, that will affect the credit potential for the other spouse who may want to purchase their own home or get a loan for any other reason. It may even be tough to rent since that liability will appear on their credit report.
Assuming the original mortgage: Assuming a loan (taking one spouses name off the loan) is desirable if there is a low interest rate on the existing mortgage and interest rates are rising. Mortgages used to be assumable but that pretty much stopped after 2008. Most traditional bank loans are not assumable but occasionally they are. If you have an old FHA or VA loan, you may be in luck because those are assumable and the costs relating to assumption are relatively low compared to refinancing. The first thing to check is your promissory note to see if the loan is assumable. Don’t assume that assuming a loan is cheaper and quicker; it may not be. The bank will want to know that the spouse remaining on the loan can make the mortgage payments, so full underwriting, a new appraisal and everything else that goes along with getting a mortgage may still be required and it could take even longer to complete that process than getting the mortgage refinanced. That can be a big surprise and meanwhile, both spouses remain liable for the mortgage payments. In the end, it may turn out the loan is not assumable and a lot of time, money and effort has been wasted. Also, getting cash from equity in the home is not possible if the loan is merely assumed.