Mortgages during Divorce

Mortgages During Divorce

Mortgage Options During a Divorce or breakdown of a relationship

A divorce means moving on to the next phase of your life. However from a financial standpoint a mortgage is a financial obligation. And as long as your name remains on the mortgage, you are financially liable for the debt even if you no longer occupy the property.

In a real world scenario if one person who is on the mortgage, moves out of the property and the other person agrees to keep paying the mortgage payments, the person moving out is still liable for the payments. This will end up affecting future borrowing ability of the person who has moved, even if they have nothing to do with that property anymore.

Therefore it is always advisable to get a clear separation of financial obligations, particularly a mortgage, during a divorce/separation.

Divorce mortgage options

Options for getting out of a joint mortgage

Here are some of the likely scenarios for getting out of an existing mortgage during a divorce and how to prepare yourself accordingly:

Sell the property - Both partners agree to end the mortgage contract by selling the house and paying off the lender (plus transactions costs such as mortgage payout penalty, realtor fees etc.) Any remaining equity can be split as agreed. This option does not require a mortgage agent/broker.
One partner moves out without taking any equity - Partner leaving requests for a "release of covenant" from the lender. The partner who is staying, "assumes the mortgage" by requalifying for the mortgage on their own financial credentials. There is no cash exchange between the partners. In terms of expenses, this might involve an appraisal fee, a lender processing fee and a lawyer fee. Generally, the Release of Covenant does not need a mortgage agent/broker.
One partner buys out the other - The partner who stays, refinances the home with the mortgage solely in their name and pays out the partner moving out by using the equity unlocked. The equity split can be whatever is agreed between the partners. The partner who remains can get an up to 95% of the appraised value of the home to buy out the other partner. The partner who is stays will need to qualify for the mortgage on their own financial credentials.
No equity, can't sell or refinance - This is an unfortunate negative equity situation and the only way to get out of it is to keep the property until their is enough equity to sell. One of the options here would be for both parties to agree to rent the property at market value using an independent property manager. The rent will help cover the mortgage, property taxes and insurance. A joint venture agreement can cover the details between the two parties. The main advantage here is that both parties now have rental income to offset the property expenses thereby reducing any negative effects of future mortgage borrowing.