Divorce FAQs | How Will Divorce Affect My Mortgage?

Divorce affects thousands of households, and one of the most common questions homebuyers ask is: “how will this affect my mortgage?” To make things simple, we’ve compiled answers to some of the most frequently asked questions about how a divorce can affect your mortgage and ability to buy another home. Our goal is to make your home financing experience as smooth and stress-free as possible.

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How does divorce affect the interest rate on your mortgage?

It is common for one person in a divorce to keep the home. Changes to the interest rate on your mortgage can occur if someone refinances the home or assumes the entire mortgage. The changes to your interest rate are determined by multiple factors, including your credit score, market conditions, and current value of the home.

What happens to debt-to-income ratios during divorce?

Debt-to-income ratios are an important factor when buying or refinancing a home. This is the ratio of your monthly debt payments to your gross monthly income. A judge may sign an obligation to divide debts between both parties. In some cases, this removes the debt related to the other spouse from the debt-to-income ratio. 

What challenges do spouses face if one wants to buy a new home before finalizing the divorce?

This is a common challenge we see during a divorce. In homestead states, if one spouse buys a new home, the ex-spouse may need to sign the title. This acknowledges that the other party is securing a new primary residence and legally connects the couple even more. It’s important to know the legal effects of these actions before deciding to buy a new home during a divorce.

How long does a person need to receive alimony or child support payments to use them for mortgage qualification?

When you go through a divorce, lenders may consider alimony or child support payments as income for mortgage qualification. However, lenders require proof that you have been receiving support for a specific period. Typically, you will need to show evidence of at least six months of consistent payments to use them in your mortgage application. 

To make this process smoother, it is helpful if both parties can agree to a written document outlining the details of the alimony or child support agreement before the divorce is finalized. Keeping thorough records of these payments, including bank transfers or checks, is crucial. Avoid accepting cash, as cash payments are impossible to trace. 

Make sure the payments are well-documented. You might also want to have the documents notarized for extra legal clarity. In some cases, attorneys may help clients draft these agreements before the divorce finalizes.

What happens if one spouse isn’t making mortgage payments during divorce?

If both spouses are on the mortgage, missed payments can still affect the spouse not keeping the home. If the spouse who retains the home is not making payments on time, it will still negatively impact both parties’ credit scores.

Both individuals are still legally responsible for the mortgage. Late payments by one spouse can lead to serious financial problems for the other. Dealing with this issue quickly is important; waiting could hurt your chances of getting loans or credit later.

Is there a difference between refinancing and buying a spouse out?

Refinancing typically involves taking out a new mortgage to replace an existing one. In the context of divorce, refinancing occurs when one spouse keeps the family home and takes over the mortgage in their name alone. The goal of refinancing is often to change the terms of the loan, such as the interest rate or the loan amount, or to remove the other spouse from the mortgage.

Buying a spouse out involves one spouse paying the other spouse for their share of the home’s equity. In a divorce, this could involve one spouse purchasing the other’s share of the property, thus taking full ownership of the home.

If one spouse decides to buy out the other, which often involves taking cash out of the home and giving it to the ex-spouse, this is not considered a cash-out refinance under Fannie Mae and Freddie Mac guidelines. This distinction can be beneficial, it allows the spouse buying out the other to access more favorable loan terms. For example, on a regular cash-out refinance, the loan-to-value ratio is typically capped at 80%, while in a spousal buyout, this ratio can go up to 90%.

How Can A Mortgage Lender Help?

If you are buying a new home or refinancing your mortgage during a divorce, the team at Chris Doering Mortgage is here to help guide you through every step. We’ll ensure you make informed decisions that work for your unique situation. Reach out today and let us help you secure a mortgage that fits your needs.