Divorce happens. And whether you’re consciously uncoupling or unceremoniously ending a failing relationship, splitting up for good can be a long and emotionally draining period wrought with legal fees and endless paperwork. On top of all that, there’s the tricky issue of dividing up shared property.
Your marital home is likely the most significant asset you and your partner own together. While many couples agree to sell the home and share the profits when they split, sometimes one partner buys out the other. But solo homeownership can be challenging—and that’s where considering a refinance of your mortgage comes in.
“If one spouse is awarded the marital residence and there is a mortgage, the spouse with the home may also be required to refinance,” says Melissa Cohn, regional vice president and executive mortgage banker at William Raveis Mortgage.
Keep in mind that refinancing requires taking out a new home loan, which means you’ll have to meet eligibility requirements before you’re approved. And though you and your partner may have sailed through a loan approval when jointly buying your home, the process can be different when you’re single.
So here’s what you need to know about refinancing your mortgage when you end a relationship.
If you are recently divorced, your finances have likely changed if you went from two incomes supporting a household to relying on one income to cover all your bills. Luckily, refinancing a mortgage can save you money, usually when the current mortgage interest rates are lower than your existing rate.
And even if your mortgage payment goes down only, say, $50 per month after refinancing, that savings will seriously add up over a 30-year loan. (To see how much money you might be able to save, crunch the numbers on an online refinance calculator.)
First, take your partner’s name off the loan and title
Lenders will hold both parties of your current mortgage accountable until you have your former partner’s name taken off the loan. Only the current lender can remove a spouse’s name from the existing mortgage. The lender will need to see the property agreement as stated on the final divorce decree to proceed.
Remember to take your ex-spouse’s name off the property’s title as well. If not, your ex-spouse could benefit from the sale of and equity in the home.
“The mortgage and title are separate,” says Shelby McDaniels, channel director for corporate home lending at Chase. “A person can be listed on the title as an owner of the property, but not included on the mortgage, meaning they are not liable for paying back the debt.
“If a spouse is only included on a title—and not a mortgage—it’s a simple process of signing a quitclaim deed to transfer ownership,” adds McDaniels.
How to qualify for a refinance solo
“To successfully refinance, the spouse planning to keep the property must qualify for the refinance loan on their own, based on their individual income and assets,” says McDaniels.
If you’re receiving alimony and child support income, that money can help you qualify—but only if you have received that income for at least three months. If you determine you have enough money coming in to qualify for refinancing, then the process can be straightforward.
Land a good mortgage rate
Remember, you’re not obligated to refinance with your current lender. So shop around and compare multiple lenders for the best rate.
“And in today’s still very low rate environment, a better rate can usually be had,” says Cohn.
The mortgage rate you’ll get on a refinance depends on your income, debt, credit score, and the real estate market environment.
To take out a new loan, a newly divorced person must have a minimum of a 620 credit score for a conventional loan refinance, according to LendingTree.com. And to qualify for a Federal Housing Administration refinance, you’ll need a minimum credit score of 580.
You can also have a maximum debt-to-income ratio of 45% for a conventional loan and 43% for an FHA loan.
“A home lending adviser can help you understand how much you can afford and whether you qualify, especially if you’re planning to refinance to become the sole owner of a property,” says McDaniels.
And always check back in with your current lender once you’ve found the best rate to see if the lender can give you an even lower rate or a discount on closing costs.
When to do a cash-out refinance
If your former partner wants a payout for half of the property, you can also consider a cash-out refinance, says Cohn.
A cash-out refinance is a way to refinance your mortgage for more money than you owe—with the difference paid directly to you in cash. You are essentially pulling equity from your home to pay your former spouse for his or her share of the property.
Just keep in mind, your new loan total will be the mortgage plus the cash you take out, so crunch those numbers very carefully before opting for this refinance option.