You are getting divorced and your marital home has a mortgage with both of you on the Note and mortgage. What will happen to the mortgage when your property is divided either by mutual settlement agreement or the court?
The most important point is that the mortgage holder (typically, the bank) holds both of you responsible for the mortgage. You both can decide to clear the mortgage obligation by one of four methods: Refinancing, selling the house, having the court ‘partition’ the house, or leaving the mortgage ‘as is’ after the divorce. There are pluses and minuses for each choice.
- Refinance the mortgage.
If you refinance the mortgage into your own name, you must individually qualify for the financing with your own credit score and income, including any alimony you receive. (The alimony must be paid by a settlement agreement or court Order for at least the next several years.) If you wish to keep the house and ‘buy out’ your spouse’s share of the home’s equity, you will still need refinance the mortgage in order to release your spouse’s obligation under the mortgage. Again, you will need to individually qualify to refinance the mortgage unless you have enough cash after the divorce to complete the ‘buy out’. - Sell the house.
Selling the house can also pay off the mortgage if the sale raises enough net cash to do so. It may take many months to find a qualified and in the meantime, the mortgage must still be paid on time. Any net money left over will be divided between you both under the terms of the settlement agreement or court Order. - Partition and sale.
The court can Order a forced sale (‘partition’) of the house after the divorce. The same issues that arise from selling the house will apply to a forced sale. - Alternative: Leave the mortgage alone. I rarely recommend this for my clients. You can convey your interest in the house to your spouse and leave the mortgage ‘as is’. The problem is that both of you still remain liable on the mortgage. If your spouse defaults even years in the future, the mortgage company will sue you both.
- Finally, there may be capital gains tax due on the house sale. My office often works with qualified divorce accountants to create the best financial results for you.