Handling a mortgage when you divorce

Divorce can be a painful and financially complicated process, even for those who are separating on relatively good terms.

Ideally, a couple’s assets are simply divided fairly between both parties. But what about assets that aren’t easily split, such as a home and mortgage?

Let’s look at some options for dealing with a mortgage when couples go their separate ways.

• The law: Community property states vs. common law states
• Selling the home together
• Removing one party from the mortgage
• Keeping the home and using it together as income property

The law: Community property states vs. common law states

The first thing to understand about dividing up property in a divorce is that your options may vary depending on whether you live in a “community property” state or a “common law” state.

In a community property state, assets acquired during a marriage are typically considered community (or shared) property — and therefore during a divorce are divided 50-50. Community property states include Arizona, California, Idaho, Louisiana, New Mexico, Nevada, Texas, Washington and Wisconsin — along with U.S. territories Guam and Puerto Rico.

All other U.S. states are common law states, where each spouse is considered generally responsible for any individual debt and property acquired during the marriage. This means that if one spouse bought a home on their own, for example, the home generally will belong to that spouse in the event of a divorce (unless both names are on the deed/title or other agreements have been made).

This is just a basic look at the scenarios for community property states and common law states. The details can get complicated, so it’s a good idea to have a divorce lawyer help sort through it all and advocate for your best interests.

Selling the home together

One of the simplest ways of dealing with a mortgage in a divorce is to sell the home together, pay off the mortgage and other costs, and split any profits.

This route requires some cooperation between separating spouses. You’ll have to make joint decisions about things like price-setting, when to sell and how to pay for things like staging the home or other details around the sale.

Selling the home and dividing any remaining proceeds can benefit all involved in many ways: Couples have a chance to make a cleaner break from both the mortgage and each other — along with each getting their share of funds from the sale.

One heads-up: If you sell the home, capital gains taxes on income from the sale could be a concern at tax time. However, if you meet certain conditions, you can likely offset much of the tax impact. Before deciding whether to sell, it’s a good idea to talk things through with a tax pro.

Removing one party from the mortgage

Another way to deal with a mortgage during divorce is to remove one spouse’s name from the loan. A couple of ways to do this might be through refinancing or a loan assumption.

Refinancing

Refinancing a mortgage involves taking out a new loan to pay off the original mortgage loan. If two borrowers are on the original loan, you can try to refinance in the name of just one of the borrowers — effectively releasing the other from responsibility and claim.

A cash-out refinance might be a good way for one spouse to refinance a mortgage solely in their name and access the cash they need to buy out the other party.

Keep in mind that if you want to take sole responsibility for a loan through a refi, you’ll need to have the income and credit to qualify. The amount of equity you have in the home will also be a factor in the refinancing lender’s decision and terms offered. And remember, refinancing is essentially applying for a new mortgage loan, with the associated costs, like origination fees.

You can shop around to check current mortgage rates and compare refinance rates on Credit Karma against the terms of your existing loan. Knowing the current rates, what you can afford, and different types of loans and terms can help you find the best mortgage refinancing options. A mortgage refinance calculator can also help you figure out what type of refinancing and terms you may qualify for.

Loan assumption

If your lender allows it, you may be able to seek a loan assumption. Unlike refinancing, a loan assumption does not involve taking out a new loan. Instead, it allows one borrower on a mortgage to assume full responsibility for the loan — with no change in terms — releasing the other borrower from their obligation.

Again, the borrower assuming full responsibility for the loan will have to meet the lender’s qualifying requirements.

Keep in mind that a loan assumption isn’t usually an option for conventional mortgages — but certain government-backed mortgages, under certain conditions and with lender approval, may be eligible. 

Keeping the home and using it together as income property

Keeping the home — with both spouses on the mortgage — and turning the property into a rental is another way to deal with a mortgage in a divorce. For this to work, both parties would have to move out and settle on how to share expenses and income from the home.

Whether a divorced couple can make this option work depends on those involved, but no matter how you proceed, such an arrangement should be worked out in a legally binding agreement.

What’s next?

Refinancing a mortgage, selling a home or transferring ownership in a divorce can affect the credit scores of both parties in the divorce as well as their taxes. Consulting with a divorce lawyer and a tax professional can help you understand the pros and cons of all your options and guide you in identifying the best choices for your particular situation.