This summer brought a slew of celebrity divorces – Ben Affleck and Jennifer Garner; Will Smith and Jada Pinkett Smith; and Blake Shelton and Miranda Lambert – to name a few. Even the love between Miss Piggy and Kermit the Frog couldn’t last.
Marriages may end, but the homes you’ve acquired when you were together are still your responsibility. And while divorce can be a tough process, resolving the mortgage doesn’t have to be. Below are three options to help you determine what to do with your mortgage after a divorce.
Sell the House
This may be the last thing you want to hear if you want to hang onto your house, but it may also be the easiest route to take. Jean Ann Dorrell, a certified estate planner in Sumter County, Florida, told U.S. News keeping the home is a common mistake among divorced homeowners.
“Many people try to hold onto a house because it’s where the kids grew up or because you don’t want the kids to have to change schools, you don’t want to lose friends and you stay too long trying to afford something you never could have or should have,” Dorrell said.
Keep in my mind if you do sell and owe more on your home than it is worth, you and your ex-spouse will be liable to pay the difference, or you can opt for a short sale.
In a short sale, the home is listed for sale at a price lower than the amount owed on the mortgage in hopes of making a quick sale. A short sale does not necessarily release you from your loan obligations, unless specifically agreed to that between the parties. However, this can often result in a negative credit report.
If you do decide to sell, make sure you understand the way capital gains tax work. Most taxpayers selling their primary residence get a $250,000 exclusion from gain and a married couple can receive a $500,000 exclusion.
Keep the House and Refinance
Refinancing your home is generally done during a divorce when only one of you is keeping the home, and the other party does not want to be legally responsible for loan payments.
Before you consider this option make sure you can afford the monthly payments by yourself, you are not underwater on the mortgage, your credit is in good shape and the former spouse agrees to let go of the house.
In some cases, your ex-spouse may want you to buy out his or her interest in the home. One way to do this is to take out enough cash from the home equity to pay the share of the non-buying party. A mortgage professional can help you determine the amount of equity you have in your home.
Keep the Home and Assume the Mortgage
A loan assumption can be a good option if you wish to keep the home and your mortgage is in good standing. Despite some fees associated with loan assumptions, they generally cost less than refinancing.
The lender will still need to verify you have sufficient enough income to make the monthly payments and you will need to meet all the lender’s qualification guidelines. You may also need to provide other documents such as a copy of your divorce decree. After the assumption is approved, the non-owning party should receive a release of liability document.
However, not every lender offers this, and not all home loans are assumable. For example, Castle & Cooke Mortgage only processes the assumptions on the FHA (Federal Housing Administration) and VA (Veterans Administration) loans we service. Contact your local mortgage professional to see if they will allow you to assume the loan.
Ultimately, if you find yourself in this situation, talk to your local mortgage professional. He or she can help you find the best solution to fit your needs.