Divorce and mortgage: navigating homeownership changes

The divorce rate has declined from 4.0% to 2.5% since 2000.¹ While we’re glad to see progress in this trend, we know that divorce still happens. And if it does, we want to help homeowners understand how to make their situation better.

Those going through a divorce will need to consider the different routes available when it comes to handling the ownership and mortgage of their home. Dealing with a co-owned property amidst the motions of divorce can feel stressful. Luckily, there are well established paths for handling this situation—which is faced by many. In 2022, more than fifty percent of couples that divorced were homeowners.²

How to handle your mortgage after divorce

On its own, a divorce doesn’t release you from the mutual debts of your marriage. These are the most common scenarios for homeowners who are handling a shared home during their divorce:

1. The divorcing couple sells their home and then divides the assets

2. One partner is removed from the mortgage and title of the home, while the other partner assumes ownership and takes over the mortgage. Sometimes, one partner will need to be paid out via an equity buyout. For example, if there was $200,000 in home equity, the vacating spouse would receive $100,000 to split the equity 50/50.

Divorcing couples that choose the second route will have to remove their ex-spouse from the mortgage via a release of liability or, more commonly, a refinance.

Release of liability

A release of liability is a document provided by the lender servicing the loan that releases a borrower from their responsibility to pay the loan. To obtain a release of liability, the person remaining on the loan goes through a qualification process resembling that of a mortgage in order to confirm that they can pay the mortgage on their own. Many lenders do not offer these because it makes the loan riskier for the lender. That’s why a refinance is a more common tool.

Cash-out refinance

A cash-out refinance allows homeowners to refinance their mortgage for more than the outstanding balance—converting home equity into cash while updating and removing the vacating spouse from the existing mortgage. The cash-out refinance route is a good option for those that need to convert home equity into cash in order to pay out the vacating partner’s portion of home equity.

Rate and term refinance

Like a cash-out refinance, a rate and term refinance allows homeowners to update their existing mortgage; the interest rate, the term, and the people listed on the mortgage. Rate and term refinances typically have lower rates than a cash out, so this route often makes sense when you don’t need to take out home equity in order to pay out the vacating spouse.

Mortgage vs title

Remember that a mortgage defines responsibility for mortgage repayment while title defines ownership to the property. If both spouses are on the title, you will also need to remove the vacating spouse from the title during the refinance process. If the vacating spouse is only on the title (and not on the mortgage) homeowners can update the title of their home through a quitclaim deed, a legal document that transfers the title of a property from one party to another.

Homeowners that decide to use a refinance while handling a divorce should contact a lender to review their options. Keep in mind that only the spouse that remains on the mortgage will be able to use their income and assets to qualify, taking into account any alimony and child support payments they will be making or receiving.

Disclaimer: This post does not constitute an endorsement or recommendation of Better Mortgage Corporation; Better Real Estate, LLC; Better Cover, LLC; Better Settlement Services, LLC; or their services. Better Cover is solely responsible for homeowners insurance services. Better Mortgage is solely responsible for making all credit and lending decisions with respect to mortgage loans.
¹Source: Forbes
²Source: Forbes