Stuck paying for a house that's no longer yours? Buying your spouse out of a property can be dicey, especially if both parties disagree with one another on the debt and equity objectives.
So here are some ways to separate and pay off an ex-spouse when getting a mortgage.
Net Yet Divorced or Separated?
First, if you and your ex are still legally married, but are not yet legally separated or officially divorced, this can pose problems related to the scope of the desired split when separating property and liens (loans).
If you’re buying a home for yourself, your spouse would have to sign a quit claim deed releasing their interest in the property you are buying since you are still legally joined with that person. The key is that the spouse must consent to releasing their interest in the transaction.
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Let's say you're trying to purchase a home, you are legally divorced and the previous property has been awarded to your ex-spouse in the divorce decree. However, for whatever reason your ex-spouse is not able to qualify for a new mortgage to refinance you off of it.
Your credit report shows a mortgage that your name is tied to on a property you no longer own nor have responsibility for. In the eyes of the mortgage lender, because the liability (loan) is tied to the property and has not been paid off with your name associated with it, the liability is still considered to be joint.
The problem here is that your credit history and credit score are directly affected by your ex-spouse's sole ability to make timely mortgage payments on the joint credit account. The only way to remove the responsibility from you, beyond the divorce decree, is for the other party to sell the house or refinance the mortgage, and taking your name off the loan, thus omitting the liability from your debt-to-income ratio on your new purchase.
Refinancing to Buy Out the Ex-Spouse
Say both you and your spouse own a home together. Without the divorce degree and without a separation agreement, both parties collectively agree that one spouse will stay in the property and will buy out the other, who is vacating the property. Consider the following scenario:
- A couple bought a house a couple of years ago for $400,000.
- The spouse leaving the property originally contributed $50,000 toward the down payment and wants their $50,000 contribution reimbursed.
- The spouse who is staying refinances, cashing out $50,000, and takes out a new loan with a market interest rate and term to buy out the other party.
Assuming a divorce decree or legal separation agreement has not yet been established, the lender would require no additional further documentation, assuming both spouses currently reside at the property and are in agreement. Providing such documentation to the lender ahead of time can help answer any questions about this that may arise in the loan process. Other things to consider:
- If you are presently separated, in most loan scenarios, the lender will consider any joint debt as the marital union is still in effect, and this could spell trouble for qualifying purposes.
- If you are in the process of a divorce, it is ideal to complete any mortgage-related activity after the divorce has been finalized.
- If you’re planning to divorce in the future (but the process hasn’t yet begun), possibly completing the mortgage transaction/buyout before the divorce has taken place could be ideal as the transaction could be wrapped up sooner for both amicable parties.
- Also, if you’re divorced and trying to buy a home, a lender will want to know whose property is whose when itemizing all real estate owned. To do that, provide a copy of your previous divorce decree -- no matter how old it is -- including all pages, all schedules and the marital settlement agreement rider.
Gift Money to Buy Out the Ex-Spouse
Let’s say you’re cash-out refinancing your house to pay off your spouse who'll be leaving the property. They put in $100,000 to purchase the property originally. Now, say the house isn't worth what you originally paid for the property and, as such, the cash-out refi will only net them back 60% on the dollar, but they want 100% of their contribution back. In a case like this, gift funds can help solve the problem by providing additional capital to complete the transaction. Gift funds can also be used for the entire amount if needed. Lenders like to see gift money coming from either immediate family or a blood relative in most instances.
Managing the Bigger Picture
If you’re trying to qualify for a mortgage while being tied to a previous property, you would be best served having an open-ended communicative relationship with your ex as doing so can often help you successfully complete a mortgage transaction. It’s also a good idea to check your credit reports and credit scores if you’re in the midst of a divorce, and well in advance of trying to buy a home.
Make sure your credit reports accurately reflect the debts that are yours (and keep in mind, a divorce decree alone won’t remove your name from a debt; you must also work with the creditor and follow their guidelines for making any changes to any joint accounts in order for it to reflect on your credit reports). Monitoring your credit scores can also be helpful at this time, as any big, unexpected drops could be a sign for you to check your credit reports for issues. If you see any trouble with your credit before you apply for a mortgage, give yourself time to fix any errors or problems and get your credit in better shape if you need to. You can check your credit reports for free once a year from each of the three major credit reporting agencies, and you can use free services, like Credit.com, to check your credit scores.
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