If you and your spouse own a home jointly and both are on the loan, refinancing your mortgage before divorce proceedings might be the best choice financially. This type of scenario has a few choices.
The first is to put the home up for sale and divide the assets or debt. The second choice is for one of the ex-spouses to stay in the home. To do so, a quitclaim deed is used to take off the other ex-spouse from the title, and the existing mortgage is refinanced. If both spouses are amicable, it can be very convenient.
Credit Scores May Fall in a Divorce
When you refinance your loan, you will have to go through a credit check. This will assess the strength of your current financial situation, including your liquidity and your debts. Usually in a fiercely contested divorce with all the legal fees, each former spouses’ credit might end up in poor condition.
What this means to you is lenders will offer you higher interest rate quotes. In contrast, prior to a divorce, your credit is usually still in good condition without those legal fees and additional expenses.
For that reason, most people’s credit is still in good shape to get the best rates on a new mortgage. So, you can see that refinancing your mortgage while you have very good credit is an excellent choice to make if all parties can agree.
Refinancing Once a Divorce Is Final is Sometimes Difficult
The advice a lot of former spouses receive is to hold off until the divorce is final, then take the other spouse off the mortgage. Getting a new loan will be necessary from the person who wants to remain the owner.
The major challenges are: the individual may not be able to qualify alone for a new loan. In this case, there is no way to take over the mortgage. If that borrower has a significantly lower income or credit score than the past joint application, then the existing lender will likely not approve either borrower. Consequently, the person who voluntarily left the house will still be liable for the financial obligation, and the refinancing could be delayed.
Divorce Proceedings Can Change Plans
Some couples handle the division of assets in a friendly manner with well thought out plans that appear ideal for both parties. However, a person’s sentiments can change from friendly and civil to combative as divorce proceedings become more emotional.
Fortunately, a judge is there to render a decision for you but it typically is not going to be the perfect financial verdict for either person. This is why before emotions cloud one’s judgment, it is wiser to finalize major financial decisions earlier than later.
You Want to Buy a Home Before the Divorce is Finalized?
Yes, it is still possible. Many attorneys advise that the future ex-spouse who wants no interest in the property needs to sign a quit claim deed to release any interest in the new home purchase.
In certain community property states, such as California, as long as you’ve filed divorce papers and get a marital settlement agreement (MSA) signed by the judge, your ex’s debts will not count against you with a lender despite that you are still officially husband and wife. NOTE: Always seek legal advice from an attorney.