When two people decide it’s time to buy a home together, in today’s environment and in many markets it takes two incomes in order to qualify for the home they really want. That means both will appear on the same mortgage application. Unfortunately the divorce rate in this country means anywhere from 40 to 50 percent of married couples decide it’s time to split. When this joint decision is made, there are a lot of other things to consider other than just finding somewhere else to live. Most likely there are different credit accounts owned jointly. Support payments, attorney fees, car loans, child care…suddenly there are lots of plates spinning. With a jointly owned mortgage however, it can get a little more complicated.
Remember, when two people take out a mortgage together, the lender will use the income from both when qualifying the couple. They’re both jointly obligated. If a divorce settlement is made and one party is responsible for the mortgage while the other is not, while the couple might have agreed to this arrangement the mortgage company was not involved. Both are still jointly responsible. Why does this matter?
It matters because if the party leaving the home is also responsible for the payment, the non-occupying spouse will have to qualify on his or her own income without the benefit of the additional income from the occupying spouse. This might very well mean some qualification issues. Some people might easily be able to take on two mortgage payments each month, most don’t. Especially those who needed two incomes to qualify in the first place. To get rid of the mortgage payment the non-occupying spouse must be removed from the responsibility of making the mortgage payment and having that active mortgage account removed from a credit report. How can this be done and still be in compliance with the original mortgage agreement?
The first way is to pay the non-occupying spouse money. The couple can determine the current equity in the home, split it in two and pay the non-occupying ex-spouse. The ex-spouse on the receiving end of the cash settlement would then agree to be removed from any ownership of the existing home. Still, though, that keeps both responsible for the mortgage. To a point.
In the instance of a divorce, a couple can petition the mortgage company for a release of responsibility. The lender will then request a copy of the divorce decree clearly stating who will be responsible for the mortgage moving forward. But not so fast. The lender will want to make sure the individual responsible for making the mortgage payment each month has the ability and willingness to do so. Different mortgage companies may have different view in this instance but most will want to see at least 12 months of on-time payments toward the mortgage before releasing the party from the note completely. At this later stage, the ex-spouse removed from the note now has the monthly obligation removed from the credit report, freeing up monthly income to qualify for a new home loan.
Another way is to have the occupying spouse refinance the existing mortgage on his or her own. Again, this might present some qualification issues but during the union the mortgage payment was being paid down. This results in a lower payoff amount which would then mean less income needed in order to qualify for the new mortgage. This is perhaps the ‘cleanest’ way to get one ex-spouse off the mortgage as well as title.
One final note here. When a lender reviews a loan application and it shows the applicant has divorced along with two dependents (children). This brings up another issue. Are there any support payments involved? If so, who is paying them? How much are they each month? Have the support payments been made in a timely manner? Are the dependents nearing 18 years old when support is no longer required? Has the ex-spouse remarried? These and other issues will have to be answered and documented.
As it relates to getting one party off the note with a goal of sole ownership, it can be accomplished, there’s just a lot more paperwork needed along with a bit more time to get the new loan approval over the finish line.