Divorcing the Mortgage

Love fades away. Marriages end. But the mortgage you agreed to pay remains intact.  A common dilemma faced by many divorcing couples is what to do with the marital residence they have acquired upon separation.  The mortgage debt is often the biggest liability the couple has to split, and divorcing your mortgage isn't an easy task.

In the eyes of the mortgage lender, you remain married and liable for the mortgage unless you sell the residence or refinance regardless of what a separation agreement or divorce judgment says. For those who can't do either, there are options that should be explored carefully.

Typically, a divorcing couple divides the family residence in one of three ways:

  • sell it on the market
  • one spouse buys out the other with a refinance of the debt
  • joint ownership with sale at a later date.  

If you can both agree to sell the residence, that's usually the easiest way to resolve the issue of the mortgage.  A good mindset is that the home was purchased during the marriage for the couple, but with the parties separated into different households, it may be best to sell the residence, pay off the mortgage and move on.  

In the current market, that's easier said than done, especially for those who owe more on their mortgages thantheir houses are worth. They would have to either pay off the difference on the loan or opt for a short sale.

As with any other short sale, the credit score of the borrowers on the mortgage loan would be affected, and the borrower might still be liable for the difference between what the residence sells for and what's owed on the mortgage, depending on whether the mortgage lender will agree to waive any deficiency owed.

Another option is for one spouse to buyout the other and refinance the loan under the name of the spouse that intends to keep the residence.  This is a viable option so long as the couple is not behind on the mortgage, the spouse intending to keep the property has sufficient credit and income to qualify for a refinance, and the parties can agree on the terms of the equity buyout of the other spouse.  

An option in lieu of the refinance would be to ask the mortgage lender if they would consider an assumption ofthe loan by the spouse keeping the property.   This would avoid refinance expenses but the same conditions apply – i.e., the spouse retaining the home must have sufficient credit and income to qualify for the assumption with the current mortgage lender.

Finally, if you or your former spouse can't sell the home, refinance or assume the loan, and don't have the money to pay off the mortgage, you'll have to come to an agreement on owning the home together and/or selling the property at some future date. The separation agreement or divorce judgment must spell out who is solely responsible for the mortgage. However this is a risky alternative, because if the spouse keeping the residence doesn’t pay the mortgage, it will still affect the credit of the other borrower on the mortgage loan and the lender will still hold all borrowers responsible for the debt.

Divorcing couples need to evaluate and weigh their options carefully when resolving the issue of the marital residence as the implications can have lasting impact on their credit and the ability to buy another home in thefuture.