What Happens to Your Mortgage After You Divorce?
One of the biggest (if not THE biggest) assets a married couple shares is their home’s mortgage. When a couple gets divorced, they must decide what to do about it. There are several options that can be tailored to individual circumstances, but no matter what, it is important to understand the consequences of every option in order to reach the most logical and financially healthy decision.
Pennsylvania, like most states, divides marital assets and marital debts through equitable distribution. Unlike the community property system where everything is split evenly in half, equitable distribution means that the court uses its discretion to divide and distribute all marital assets and marital debts (including mortgages) in a way they determine to be the fairest. The court may consider factors like the length of the marriage, the income of both parties, and the standard of living during the marriage, but they may not consider fault or marital misconduct. However, in many cases, the divorcing couple reaches a settlement before entering the court system.
1. Sell The House
Selling the house is often the simplest, best option for both parties in a divorce. The couple can simply put the house on the market, split the profit (or share in the shortfall) once it sells, and move on. However, especially when children are involved, selling the house is not always an easy or viable decision. One or both parties may not be able to afford to purchase a new residence or even the deposit on an apartment.
2. Keep the House
If a divorcing couple does not want to sell the house, and they also do not want to continue living together, then they need to decide which one of them will take over the mortgage payments and retain exclusive possession of the house.
Once decided, either through negotiations or by order of the judge, the spouse who remains in the house should refinance in their name alone. If you are the spouse who will not remain in the home, you want the mortgage to be refinanced in order to end your liability for that mortgage. However, the other spouse is not always able to qualify - factors like increased interest rates, income, FICO score, and debt all affect one’s ability to qualify for a refinance loan. In cases where the spouse does not qualify, the parties will need to come to an agreement on how the spouse remaining in the home will make the mortgage payments . We do not recommend this arrangement no matter how amicable the divorce.
Even if the spouse who moved out has their name removed from the deed, that spouse remains legally responsible for the loan and will be on the hook for mortgage payments in the event the other fails to pay for any reason. Furthermore, if the spouse who moves out wants to buy another house for themselves in the future, they may not be able to qualify for another loan while their name is still on the prior mortgage.
For some couples, this is the only option. We strongly recommend having a written agreement concerning how the mortgage will be paid, how other expenses for maintaining the home will be paid, and what happens if the resident spouse defaults on their obligations. If one spouse moves out, the other may want the right to move back in. The non-resident spouse may also want the other to purchase a life insurance policy to cover the balance of the mortgage in the event of death.
Beyond buying another home, this situation can even prevent the non-resident spouse from renting or borrowing money. Potential landlords or lenders may fear the spouse will not be able to afford the monthly rent while being legally obligated to the prior monthly mortgage.
3. Rent out the House
Some couples choose to rent out their house after they divorce. This is often not favorable because it keeps the ex-couple’s finances tied together and forces them to communicate with each other. Those who choose this option often do so because they do not have equity in the house, own other rental properties together, etc. It is important in this situation as well that you have a written agreement with your ex-spouse about who collects the rent, pays the bills, how you share expenses in the event the rent is insufficient, or you lose renters. This arrangement can be a mess, so do not enter into it lightly.
We're here to help
The experienced attorneys and real estate professionals at Clover Lane Settlement Services are here to help you every step of that way. Contact us today to learn more or get started on refinancing. If you or someone you know is going through a divorce, reach out to the experienced divorce attorneys at Fiffik Law Group.