Divorce and Your Mortgage: Here’s What to Know

Mortgage Options in a Divorce

Depending on the details of your mortgage, the circumstances of your divorce and other variables, you may have limited options for splitting your house. Here are some of the possible next steps:

1. Sell Your Home

The easiest option is often to sell the property and split the profits. Depending on where you are in the divorce process, you might agree to sell the home while the case is still pending rather than after it’s settled.

If you go this route — and many couples do — consider the costs first. These might include the real estate agent’s commission, the costs of repairs or staging, property transfer taxes and capital gains taxes. These expenses are typically deducted from the proceeds of the sale.

For example: Say you and your ex sell your home for about $400,000. You’ll first use the money to pay off the mortgage. If your remaining balance is about $275,000, you’ll then have $125,000 to pay Realtor commissions — typically five or six percent of the sale price, or $24,000 in this case, if you pay the buyer’s agent — and closing costs, which average $6,905 nationally. That leaves you about $94,000 to split as required by your state and established by your attorneys.

2. Refinance Your Mortgage

This is where we come in!

We can help you navigate the process of buying your ex out.

We have the knowledge to help you make this process as painless as possible. For example:

Typical cash-out refinance: FHA limits how much equity you can take out (usually up to 80% LTV) and requires the borrower to meet higher credit and qualifying standards. The funds taken out are treated as “cash-out.”

Divorce / legal separation refinance (sometimes called an "equity buyout"): If one spouse is refinancing to remove the other spouse from the loan and/or title (as part of a divorce decree or legal settlement), FHA does not classify this as a cash-out refinance.

This means the remaining spouse can refinance up to 97.75% LTV (the standard for rate-and-term refinances), even though equity is being used to pay off the ex-spouse.

Key condition: the divorce decree or settlement agreement must document the equity payout to the departing spouse. This FHA exception helps divorcing spouses keep the home without being penalized by stricter cash-out rules.

Case Study:   Say you decide to keep the $400,000 home and pay your ex for their equity — in this example, half of $125,000, or $62,500. To get that $62,500, you might refinance to a new mortgage for your remaining balance ($275,000) plus $62,500, and use the cash to pay your ex. Alternatively, you could apply for a home equity loan for $62,500 — but then you’d be responsible for payments on the new loan as well as the mortgage.

3. Other Mortgage Options After Divorce

Other mortgage options that may be worth considering amid a divorce include:

• Keeping the mortgage as-is: Retaining the mortgage as-is can have drawbacks. Both individuals on the loan are still legally liable for mortgage payments, and if one person doesn’t pay, the other will be affected. A divorce agreement should specify who is responsible for payments, but there’s a risk that one party may not follow such an agreement.
• Renting out the property: If the property is retained jointly, you may also consider keeping your ownership stake and renting out the property. You will need to settle with your ex on who will receive what portion of any rental income and also who will be held liable for damages or repairs.
• Assuming the mortgage: A mortgage assumption is another option, though a less-common one. In an assumption, one mortgage holder transfers the loan to another person, who then pays the remaining balance at the mortgage’s existing loan terms and interest rate. Many mortgages don’t allow for assumptions, but it’s worth checking with your servicer. If it is an option, the process can also be used to formalize any changes in ownership of the home.