Traditionally, the house that a couple shares has been a point of major contention when they decide to divorce. But in light of the housing bust in recent years, this classic property division argument has shifted somewhat. Instead of arguing over who gets to keep the house, divorcing spouses are talking about who should be sacked with paying the mortgage.
If the mortgage is underwater — in other words, exceeding the value of the property — it becomes a hot potato neither spouse wants to handle. If you don’t plan to sell the house, it’s usually best for the spouse keeping it to refinance. That way, you can take the other spouse’s name off the title, allowing you to fully cut ties with someone you no longer want to be attached to. The danger of not doing this is that your mortgage lender can hold you jointly and individually responsible for the payments. If a payment is late or missed, it could affect both of your credit scores, no matter what the two of you arranged.
Another danger of keeping a joint mortgage is that the spouse moving out might not be able to buy another house. The existing mortgage will affect that spouse’s debt-to-income ratio and affect her ability to get a new home loan.
Once you decide to refinance, you have some more hurdles to jump. The current lending climate has made it more difficult for people to get a new loan for a house. A smaller income, negative equity and a low credit score can all affect your ability to refinance. Possible solutions to this problem include finding a more flexible loan product, finding a co-signer or the federal government’s Home Affordable Refinance Program, which enables homeowners to refinance with negative equity. Just remember to figure in the cost of the refinance — aka closing costs, which can cost several thousand dollars.
If refinancing turns out not to be a good option, you can always sell the house. But even this solution will require you to sit down with your spouse and work out myriad details: getting it in a condition to sell, which can be a sizeable investment in itself, and then splitting up the profit. If you’re not able to sell it for more than you owe on the mortgage, you’ll have to decide how you’re going to pay the difference. Whatever you decide, you’ll need to cooperate with your ex just a little bit longer.
Source: Nasdaq.com, “How to divorce your mortgage,” Marcie Geffner, Jan. 26, 2012