Divorce and Your Mortgage: Here’s What to Know

How to negotiate mortgage responsibilities in divorce settlements

Negotiating is key when discussing how the mortgage will be handled throughout and following the divorce process. A structured approach can help prevent missed payments and credit damage. Here’s how to come to an agreement, step by step:

1. Gather all mortgage-related documents. Start by collecting the mortgage note, most recent statement, payoff amount, interest rate, escrow details, and property tax and insurance bills. You’ll need these to understand your obligations and help you negotiate.
2. Assess equity and affordability. Determine your home’s approximate market value and how much equity (if any) exists. Separately, review both your and your ex’s income and debts to assess who can realistically handle payments short- and long-term.
3. Decide who will pay in the meantime. Before the divorce is finalized, decide who will make mortgage payments and how long that arrangement will last. Clarify whether payments count toward support, asset division or reimbursement later.
4. Discuss liability and credit risk. Talk through what happens if payments are missed. If both names remain on the loan, both credit scores are at risk. Some couples agree to shared account access or proof-of-payment requirements.
5. Consult professionals early. Work with divorce attorneys, mediators and, if needed, a mortgage professional to reality-check assumptions. This can prevent agreements that lenders won’t honor or timelines that aren’t feasible.
6. Put everything in writing. Any agreement should be clearly documented in the divorce settlement, including deadlines, enforcement mechanisms and consequences if refinancing or sale milestones aren’t met.

What mortgage options do you have when divorcing?

Some couples will be able to agree on which mortgage option to pursue when they file for a divorce, but if not, the court will decide which action must be taken.

1. Sell the home and split the proceeds

Selling your home and splitting the profits allows you to make a clean break from your spouse and home. This option allows for a fair distribution of assets and the chance for both parties to start new.

However, this option only works smoothly if both parties can agree to sell the home at the current market value. One party might feel the home is worth more, or there is a possibility that you are both upside down on the mortgage. Homes can also hold a lot of emotions, especially when children are involved, making it harder to sell and move.

2. Refinance the mortgage

“If both parties are on the mortgage and one spouse ends up 'keeping' the house, then they will usually be given a time frame in which to refinance the mortgage into their name,” said Derek Jacques, attorney at The Mitten Law Firm in Southgate, Michigan.

“The spouse that will be removed from the mortgage is usually instructed in the judgment of divorce to sign a quitclaim deed to remove themselves from the title as well.”

Jacques, who has represented spouses on both sides of this kind of situation, said: “It is the best case for both. Obviously, the spouse that isn't living in the home doesn't want to be on the hook for the mortgage payment if their ex defaults. It also makes sense to remove the other spouse from the title, as it will make selling the home in the future a much smoother process.”

The downside to this decision is that the spouse who wants to keep the home might have to refinance at a higher rate than the original mortgage rate or do a cash-out refinance to pay for the equity due to the other partner. Additionally, they will have to pay typical refinance costs, such as appraisal fees and closing costs.

» MORE: Best cash-out refinance lenders

3. Assume the mortgage

A divorce mortgage assumption typically happens after one party is awarded the family home through a settlement or court order. If you are granted the right to assume the mortgage, you will need to prove that you can carry on the loan without your spouse’s assistance. This option allows the mortgage interest to stay the same, and there will not be any closing costs.

However, mortgage assumptions cannot be done on all types of home loans. Conventional mortgages are not assumable, though FHA, VA and USDA loans are assumable if the criteria are met.

It is also important that the non-assuming party is removed from the title and loan so they no longer have payment responsibility or any rights to equity or sale decisions.

4. Keep the joint mortgage

Co-owning your home after your divorce is an option that is especially appealing if the market is poor or if you are underwater on the mortgage. It can give one partner more time to save up funds to buy out the other partner and remove them from the title and loan.

But co-owning can be risky, and you'll need to establish clear agreements and boundaries with your ex-spouse to ensure smooth co-ownership and avoid potential conflicts down the line, such as which partner can claim the mortgage interest tax deduction. Both of your credit scores will be affected if the monthly payment is missed or late.

Legal and lender considerations for divorce and your mortgage

Divorce proceedings can get challenging when both parties aren’t civil and fair. Whichever option you choose for your mortgage, you want to ensure that it can stand legally.

Divorce decree vs. lender requirements

A divorce decree does not override a mortgage contract. While a judge can decide who should pay the mortgage, they cannot force a lender to remove a name from the loan. The lender views your divorce as a "third-party agreement" that doesn't change your original signed promise to pay.

To align your settlement with lender reality, follow these steps:

• Verify qualification: Before finalizing the decree, confirm the spouse keeping the home can qualify for a solo loan.
• Set deadlines: Include a specific date in your decree by which the house must be refinanced or sold.
• Coordinate the title: A quitclaim deed is needed to legally remove one’s name from the title. Only sign a quitclaim deed in tandem with a refinance. Transferring the title without payoff can trigger a “due-on-sale” clause, making the full loan balance due immediately.

While your divorce attorney should help you with how to split shared equities, there are specialized divorce real estate agents who can also make the process less complicated.

Limitations of court authority

A court can order the sale of a home, but it cannot force a lender to accept a loss. This creates a major hurdle for underwater mortgages. While a judge may authorize a short sale, the lender still has the final say. If the bank denies the request, the court cannot compel it to take less than what is owed.

A judge also cannot stop a foreclosure if payments cease during the divorce. If neither spouse maintains the payments, the court’s only remaining power is to decide how to allocate the resulting debt or credit damage between the parties.

Buying a new home

It is possible to buy a home while going through a divorce, but you won’t be able to rely on your joint income or credit scores.

“Another important consideration is the mortgage debt that limits a spouse's ability to secure a new loan or mortgage,” said Patrick Baranowsky, a divorce financial analyst at Baron Analytics.

“A spouse can seek a court order that offers something called a contingent liability, and it says if there is a ‘court order assignment of debt’ like in a divorce case, the lender does not have to count that debt against that person when buying a new home.”

Tax implications

Selling your home can trigger capital gains tax in some situations.

• Married couples receive a $500,000 tax exemption if they have lived in their home for at least two years out of the past five years.
• If you lived in the house less than that or are set to profit more than $500,000 on the sale, you will need to claim the money as capital gains rather than income.

Protecting your credit during and after divorce

Divorce can have a significant impact on your credit score, especially if joint debts and financial responsibilities are not properly managed.  Here’s how you can protect your credit throughout the divorce process.

Your credit score may dip during a divorce. Monitor your credit report for any discrepancies.

• Keep an eye on your credit report: Monitor your credit report during your split and address any inaccuracies or discrepancies right away.
• Close joint accounts: Settle joint debts and close joint accounts if necessary. Since all states rule differently, you need to know which debts you are responsible for and which ones will not affect you; don’t assume you won’t be saddled with a debt just because your name isn’t on it.
• Open new credit accounts: It can be wise to open up a new credit card in only your name in the early stages of divorce so that you can have one card you use and pay off regularly. This will allow a positive payment history to be reported regularly to the bureaus.
• Expect a credit score hit: Expect your credit score to dip while you sort out your financial accounts in divorce. Closing accounts can affect your average account age, which is weighted as 15% of your FICO score.

» MORE: How to check your credit score

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