Mortgage Financing Through A Separation Or Divorce

Zach Silverman | August 30, 2023

Divorce or separation can be emotionally challenging, and the financial aspects can add another layer of complexity. One critical area that requires attention is the shared property, particularly the family home. Dealing with mortgage financing during this time requires careful planning and consideration to ensure both parties can move forward with their lives.

First and foremost, open and respectful communication between both parties is essential. Regardless of the circumstances, working together to find a solution that serves the best interests of both individuals is vital. This includes discussing what should be done with the family home and how the mortgage will be managed moving forward.

In this article, we'll delve into some key points to consider when navigating mortgage financing through a separation or divorce.

Keep making your payments.

A mortgage is a legally binding contract between you and the lender. It doesn’t take marriage into account. If your name appears on the mortgage, you're responsible for making sure the regular payments are made. A marital breakdown does not give you an excuse not to make your mortgage payments.

If, during your marriage, you've relied on your spouse to make the mortgage payments and you aren’t certain payments are being made after separating, it's in your best interest to contact the lender directly to verify your mortgage is being paid. If payments aren't being made, it could affect your credit score or worse; the lender could start foreclosure proceedings.

There is always a financial cost to break your mortgage.

When working through how to split your finances, you decided to either refinance your mortgage, remove someone from the title, or sell the property, keep in mind that you will incur legal costs.

If you’re in the middle of a term, the penalty for breaking your mortgage might be significant, especially if you have a fixed-rate mortgage. It’s certainly worth contacting your mortgage lender directly to verify the cost of breaking your mortgage. Having that information accessible when writing out your separation agreement will provide increased clarity.

Assessing Ownership and Mortgage Responsibility.

During a divorce or separation, it's important to determine who will retain ownership of the family home and who will take on the responsibility of the mortgage payments. There are a few options to consider:

Sell the Home: If both parties agree, selling the home and splitting the proceeds can be a straightforward solution. This allows a clean break from shared financial obligations.
Buyout: One party may choose to buy out the other's share of the home's equity. This involves refinancing the mortgage in one person's name and paying the other party their share of the property's value.
Continued Co-ownership: In some cases, especially when children are involved, the parties may decide to continue co-owning the property for a certain period. This option requires careful legal and financial planning, including setting up a formal agreement to address ongoing mortgage payments, property maintenance, and potential future sale.

It could be harder to qualify for a new mortgage.

If one party is keeping the family home, mortgage refinancing may be necessary. This involves reapplying for a mortgage in one person's name, which can be challenging if they don't meet the lender's requirements on their own. Factors such as credit score, income, and debt-to-income ratio will play a significant role in the approval process. With the separation of assets also comes the separation of incomes. If you qualified for your existing mortgage on a double income, you might find it hard to maintain the same quality of lifestyle post-separation.

This is where careful planning comes in. Working closely with your independent mortgage professional will ensure you understand exactly where you stand. You’ll want to put together a plan for how to handle the mortgage on the matrimonial home.

Listing your marital status as separated or divorced.

When completing a mortgage application for securing new mortgage financing, when you list your marital status as separated or divorced, you can expect that a lender will want to see your legal separation agreement or your divorce papers. The lender wants to make sure you aren’t responsible for support payments. So if you haven’t finalized the paperwork, expect delays in securing mortgage financing.

Purchasing the matrimonial home from your ex.

There are special considerations given to people going through a separation to buy out the matrimonial home. Instead of looking at the transaction like a refinance where you can only borrow up to 80% of the property’s value, lenders will consider one spouse buying out the other up to a 95% loan to value ratio. This comes in handy when dividing assets and liabilities.

Seek Legal and Financial Advice.

Navigating the complexities of mortgage financing during a separation or divorce is not something to do without professional guidance. Consulting both a legal professional and a financial advisor is highly recommended. A family lawyer can help ensure that all legal aspects are considered, while a financial advisor can provide insights into the financial implications of different decisions.

Navigating the ins and outs of mortgage financing isn’t something you have to do alone. If you're going through a separation and you’d like to discuss all your mortgage options, please connect with us here at Silverman Mortgage Group anytime. It would be a pleasure to walk you through the process.

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