A reader of AskTheMoneyCoach.com wanted to know how to protect their credit rating and refinance their mortgage during a divorce. It’s a tough situation that millions of people face each year. Here’s their question and the answer to this dilemma.
Q: I am going through a divorce. We’ve closed our joint accounts but we still have a mortgage together. I am moving out but he is keeping the house. The bank will remove my name from the mortgage if he refinances the house in his name only. I don’t want to ruin my credit. What should I do?
A: Maintaining a good credit rating while going through divorce can be very tricky. On the one hand, even if the two parties who are separating can agree on how assets and liabilities (like that mortgage) are supposed to be split, that does not mean that your creditors are bound to those terms.
In fact, whatever deal you work out with your soon-to-be ex-spouse has no bearing whatsoever on your legal responsibility to repay debts for which you and he were both co-signers. In a nutshell, this means that if the two of you co-signed for credit cards, your house, a car note, or anything else, then your creditors can still legally come after either one of you for repayment.
Let Your Ex Refinance the House ASAP
Refinancing your mortgage is the process of taking out a new loan to pay off an existing mortgage. This can be done for a variety of reasons, most commonly to lower a person’s monthly payments, get them cash out of their home equity, or switch from an adjustable-rate mortgage to a fixed-rate mortgage.
However, refinancing can also be done strategically to aid two divorcing individuals. The refinance helps the divorcing couple by creating a new loan. In effect, both parties use the refinance to pay off the current or existing home loan — and then just one of the parties gets a new home loan in their name.
If what you’ve stated is correct, and the bank is willing to take you off the loan once your divorce is finalized, then you are in a far better position than most people. Frankly, lenders don’t just automatically remove people from loans simply due to divorce.
In your situation, it could be the case that your soon-to-be ex husband has already shown the bank his finances (or gotten pre-qualified or pre-approved for a new mortgage), and the bank knows that he could qualify for a home loan on his own. If so, he can simply refinance your existing mortgage upon your divorce and put the house in his own name.
Either way, it is clear that the longer it takes to get that divorce decree, the more potential exposure you have in terms of protecting your credit rating. Conversely, the sooner you can get that divorce decree, the less risk you face that your credit could be ruined by his potential failure to pay.
How to Protect Yourself
When a home is involved in a divorce proceeding, and both individuals are on the mortgage, the single best way to protect the credit rating of both parties is to sell the home. This way, the bank gets paid off and your joint obligation is satisfied.
Of course, the two of you will have to decide how to split the proceeds from the sale of the house – another potentially thorny issue. But it’s far less dicey than sweating it out month after month, and keeping your fingers crossed hoping your ex will pay the mortgage as agreed.
I realize, of course, that for a host of reasons, some people may not want to sell a home, even if they are divorcing. Maybe the house still has sentimental value, to one or both parties.
Perhaps kids are involved and you want to keep the house to provide stability to the children. Or maybe you’re reluctant to sell simply because it’s a rotten housing market in your local neighborhood. Whatever the case, selling may not be practical or feasible. If it isn’t, consider another option.
Tighten Up That Property Settlement Agreement
A Property Settlement Agreement (PSA) is a legally binding document that outlines the division of assets and liabilities between two parties in the event of a divorce. This agreement is typically negotiated between the two parties, or their respective attorneys, and then signed by both parties.
As stated, your divorce agreement – even after it’s signed off by a judge – doesn’t have the legal right to change the terms of your original mortgage agreement. Those terms and repayment stipulations were locked in when you both signed for the home loan. What you can do, however, is include in your divorce agreement or Property Settlement Agreement a strongly-worded paragraph that addresses several aspects concerning the house.
First, your PSA should note that your ex-husband is assuming full ownership of and liability for the home. Next, the PSA should state a certain effective date that he is solely responsible for the house – including the mortgage, property taxes, any HOA dues, maintenance on it, etc. Additionally, include a clause indicating that until the divorce is finalized, the mortgage company is to also give YOU a copy of the monthly statements and correspondences. That way you can keep an eye on things and bring up the issue early on if he doesn’t pay on time.
Consequences of Non-Payment
Missed payments on any loan or debt can lower your FICO credit score and damage your credit rating and overall finances. This is especially true if the loan or debt was part of the divorce settlement and you are unable to make the payments as agreed. Failing to pay under these circumstances leads you open to further court actions, which can be costly and time-consuming.
The PSA should note financial penalties and consequences that are imposed in the event that he doesn’t pay. For example, for every missed payment – or every payment that’s 30 days late – he might be forced to make a certain cash payment to you. Moreover, you could insert a phrase stating that his failure to pay the mortgage effectively amounts to a judgment in your favor against him.
If it turns out that you ever have to pay the mortgage company to preserve your credit rating, you can take your ex to small claims court, or use that judgment against him to garnish his wages and seek other legal remedies. A good attorney will be able to help you word this appropriately in your Property Settlement Agreement, and advise you about your state laws.
Why Your Separation Date Is Critical
One final bit of advice: You stated that you will be moving out of the home in the future. Be sure to consult an attorney in your area for insights into two areas that may be impacted by your planned move. First, if you have kids, and you want to keep custody (or even have joint custody), find out whether or not moving would in any way jeopardize your ability to retain custody. Additionally, understand how your state looks at your “Separation Date.” Is it the date divorced papers were filed, the date you moved out of the house, or simply the date that you formally told your spouse that you wanted a divorce?
Different states count your separation date in different ways. But this date is a vital legal benchmark. This date is crucial because it can determine a host of financial aspects, such as your alimony payments, your pension benefits, the date at which the market value of the home is assessed, and so on. In general, most states won’t hold you responsible for debts your ex-spouse incurred after your separation date. But debts amassed before then are often considered owed by both parties.
More FAQs about this topic
What happens if my husband won’t take my name off the mortgage?
Up to now, we’ve assumed that you want to take yourself off a mortgage and that the new loan would be solely in your ex spouse’s name. But what if your former spouse won’t agree to letting you off the current mortgage? Perhaps they’re worried about whether they would be able to maintain the home financially by themself — or they fear that they won’t have the good credit or cash to qualify for a refinanced loan on their own.
If your ex spouse refuses to let you take your name off a mortgage (during or after a divorce), it can be difficult to work out a deal, but not impossible.
You’ll have to think deeply about what is the real goal for each of you. You might be interested in reducing your credit risk and your exposure to a home loan on a property that you no longer want or live in. Your former spouse may be focused on maintaining the home for sentimental reasons, and perhaps keeping it at all costs.
Given these differing goals, the key is to try, as much as humanly possible, to address both parties’ needs. Perhaps you can put into your divorce agreement that your ex will only keep the home until a given, specified date in the future (not too long term); or maybe until the kids reach a certain age. That would be you compromising a bit. For their part, they would be compromising by agreeing to refinance the home (and take you off the mortgage) or sell the property at the agreed upon date.
Another option may be a loan modification. Generally, this would be best pursued only if two parties have already had credit damage as a result of one or both individuals failing to pay a home loan on time.
A loan modification is when you and your lender agree to change the terms of your loan. This could involve reducing the interest rate, extending the loan term, or even forgiving a portion of the debt. You might inquire with your lender if this is at all feasible given the ongoing divorce. Although a modification wouldn’t necessarily take you off the mortgage, it may help an uncooperative spouse be more open minded to the process of separating your finances, simply because they know that the mortgage will be less financially burdensome going forward with a loan modification.
What if my ex won’t refinance our house
If you and your ex-spouse own a home together, as mentioned, it can be sometimes be difficult for one person to refinance the mortgage after a divorce. This is especially true if one of you is not willing to cooperate with the process. In this situation, there are several options available to help resolve the issue.
The first option is to try and negotiate an agreement between both parties. This could involve one spouse buying out the other’s interest in the property, or both of you agreeing to remain on the mortgage and continuing making mortgage payments together. (The latter should be a last resort).
Another option is to try and find a new lender who is willing to refinance the loan if initial attempts at this were not successful. By addressing whatever problems or objections another lender had about the loan application, a successful refinance may be possible.
If all else fails, you may have to sell the house in order to pay off the mortgage and divide any remaining proceeds between you and your ex-spouse. Should you decide to sell the home, you will need to make sure that both parties are in agreement and that all proceeds from the sale are divided fairly between you and your ex-spouse.