Refinancing Your Mortgage After a Divorce
While some homeowners decide that selling the shared house is the way they want to divide assets during a divorce, there are alternative options to consider. It may be possible for either party to keep the house while removing the other party from the mortgage through a refinance.
Refinancing is when you replace your existing loan with a new loan under new terms. If you’re getting divorced, it may be in your interest to change the terms of your mortgage loan.
In this guide to refinancing your mortgage after a divorce, you can learn the following:
- Key reasons for refinancing due to divorce
- How refinancing works after divorce
- And what happens if you can't refinance after divorce
Reasons to Refinance After a Divorce
There are many different reasons to refinance, but specifically during a divorce, refinancing can give you a path to a clean separation of real estate assets and liabilities from your partner. Here are three reasons homeowners may choose to refinance after a divorce.
To Remove Yourself From the Mortgage
If the mortgage is in both your names, you’re both equally responsible for the debt, even if you’re divorced and your partner is keeping the house.[1] If you were to stay on the mortgage and your partner missed mortgage payments, your credit score could be impacted.
So if you aren’t going to remain in the house, it’s in your interest to remove yourself from the mortgage by having your partner refinance the mortgage to remove you. This will relieve you of any future liability for the debt and protect your credit record.
To Remove Your Partner From the Mortgage
If you are keeping the house, you may want to refinance to remove your partner from the mortgage to release them from the debt liability and provide a clean break. However, it is important to note that removing your partner from the mortgage does not automatically remove them from the deed to the property.[2]
Consult your attorney to confirm that your partner has no claim to your property if you plan to remove them from the mortgage.
To Change the Terms of Your Existing Mortgage
What if the mortgage is only in your name, but your divorce settlement stipulates that you must buy your partner out of their share of the house if you want to keep it? In this case, you don’t need to refinance to remove your partner from the mortgage, but you could use a cash-out refinance or a home equity line of credit (HELOC) to tap into your home’s equity for the funds to buy out your partner.[3]
How Does Refinancing Work After Divorce?
The exact details of refinancing after a divorce may depend on your individual situation, but the general refinance process is the same.
You may start by providing financial information to your lender for the person(s) who will be named on the new loan. In the same way that your lender checked your finances and credit to confirm that you qualified for the original mortgage, your refinance lender may do the same to ensure you or your partner qualify for a refinance.[4] If you are ready to move forward, you can start the application process online.
Importantly, if you or your partner plan to get off the mortgage, the other party must qualify alone (or with a new co-borrower). This means the party who plans to keep the house will need strong enough credit and enough income to qualify for the loan without the other.
Alimony and child support can affect your ability to qualify.[5] If you’ll be paying alimony and/or child support, this amount may be considered a debt obligation, effectively reducing the amount of income you can claim. If you’ll be receiving alimony and/or child support, your lender may need to see a history of payments to confirm this as reliable income.
Suppose the lender approves the application for a refinance. In that case, an appraisal may be ordered to confirm the property's current market value, and you’ll be one step closer to closing on your refi.
Is It Better to Refinance Before or After Divorce?
There is no right time to refinance due to divorce. The benefit of waiting until the divorce is settled is that both parties can clearly understand financial obligations, which could impact the decision to refinance. The downside to waiting is that interest rates could potentially rise in the interim, causing a higher interest expense on the new loan.
How Long Do You Have to Refinance After Divorce?
There is no limit on the timeframe for refinancing after divorce. In fact, some couples choose not to refinance after divorce at all, and other couples are unable to refinance immediately after a divorce because they don’t qualify for a refinance.
While there is no designated time period, you might choose to refinance soon after a divorce to provide a clean split of assets and liabilities from your former partner.
What Happens If I Can't Refinance After Divorce?
If you cannot refinance after divorce because you or your partner don’t qualify for a refinance, you can explore alternatives to refinancing.
Alternatives to Refinancing After Divorce
You have a few options to consider if you are unwilling or unable to refinance after divorce:
- Ask for a mortgage assumption. Some lenders may allow one party to “assume” the responsibility for the other party’s share of the debt obligation. Be aware that divorce assumptions that release a former spouse from liability require financial qualification.
- Sell. You could sell the property and split any proceeds between the parties.
- Wait. You could keep the mortgage as-is until you are willing and able to refinance or sell. In this case, everyone named on the mortgage will be jointly responsible for the loan, regardless of who is living in the home.
The Bottom Line on Refinancing After Divorce
Refinancing allows divorcing couples to divide their real estate assets and liabilities cleanly without having to sell the property. By refinancing, you can ensure that only the party retaining possession of the property is responsible for repaying the mortgage loan. But to do this, that party must qualify for the loan based on their current income, debt ratio and credit score. You can learn more about the refinance process and apply for a refinance online with PNC Bank.
