I’m Getting The House In My Divorce. Do I Have To Refinance The Mortgage?

Read Time: 3 minutes

Few events are more difficult than divorce. Couples with real estate must decide who gets the home and if the mortgage must be refinanced. These issues are important because a home is likely to be a couple’s largest asset, and the mortgage is just as likely to be their biggest debt.

There’s no perfect answer to the question of who gets what, however there are a number of possible approaches, including these common options.

Remove a Spouse’s Name from the Mortgage

Since both parties signed the original mortgage paperwork, each is responsible for repaying the entire debt in the event of default – not just a portion of it. Without full and timely payments, the property can be foreclosed, the home lost, and the credit scores of both husband and wife reduced for a very long time.

In a divorce situation, one party may get the house while in exchange the other will no longer be responsible for the mortgage. However, to end responsibility, either the husband or wife must be released from the current mortgage or the property must be refinanced.

To find out more, contact the lender and ask if a spouse’s name can be removed from the mortgage. If okay with the lender, the existing mortgage remains in place, a very attractive option if the couple has a recent mortgage with a low rate. Meanwhile, with a lender’s release the other party is no longer responsible for repaying the debt.

Sounds easy, but the reality is that a lender release is unlikely. The loan was taken out by both husband and wife and each is fully responsible for repayment. If one name is removed the lender has less security and more risk, exactly what lenders don’t want. Also, if the loan has a low rate, by not allowing a release the lender is essentially forcing the couple to refinance the loan. This is good news for the lender, because the money it gets from a pay-off can be loaned again at today’s higher rates.

Refinance the Mortgage After a Divorce

If the lender will not provide a release for one of the borrowers – and if the couple wants to keep the property – then refinancing is a logical option. This clears the way for one party to own the home and frees the other from the mortgage liability because the old mortgage is replaced with new financing. Also, if there’s a cash-out refinance, equity in the property can be taken out for the benefit of the husband, the wife, or both.

But, once more, there’s a catch. When the property was originally financed the loan application was likely based on two incomes, the money earned by both the husband and the wife. By refinancing and getting one spouse off the debt only one income is being used to refinance.

Does one spouse have the income and credit to refinance? In a tight situation, the spouse keeping the house and refinancing may want to look for a loan program with liberal qualification standards, especially debt-to-income ratios (DTIs). Good candidate programs include FHA and VA mortgages, Freddie Mac’s Home Possible and HomeOne programs, as well as Fannie Mae’s HomeReady loans.

Down payment requirements should not be a major hurdle for spouses who refinance. The reason? All the equity that’s been piling up is likely to be sufficient to meet down payments needs. For instance, during the past few years home values have risen substantially, up 9% in 2019, 12.9% in 2020, 15.4% in 2021 and 3.9% in metro areas during 2022, according to the National Association of Realtors.

Get First-time Buyer Status After a Divorce

Both husband and wife can go their separate ways after a divorce and buy or rent as they prefer. Interestingly, one or even both may qualify as “first-time” buyers if they search for new financing or down payment assistance.

Huh? How can they be first-time buyers when they just sold a home? The answer is that many mortgage and down payment assistance programs have special provisions for those who are divorced.

Freddie Mac, as one example, explains that “a displaced homemaker or a single parent may also be considered a First-Time Homebuyer if the individual had no ownership interest in a residential property during the preceding three-year period other than an ownership interest in the marital residence with a spouse.”

For details and specifics, speak with such experts as family attorneys who specialize in divorce, your current mortgage lender regarding a liability release, and with loan officers in general to refinance.

Peter G. Miller

Peter G. Miller is a nationally-syndicated columnist, the author of seven books published originally by Harper & Row (including one with a co-author), and has contributed to leading online sites and major print publications. He has appeared on numerous media outlets including the Today Show, Oprah!, CNN, and NPR.

Peter has been an accredited correspondent on Capitol Hill and a member of the White House Correspondents Association. He has served with the District of Columbia National Guard and holds both BA and MS degrees from The American University in Washington, DC. View Peter on LinkedIn.

Get Approved to Refinance at a Great Rate

Get Started