Divorce and Mortgage: What Happens to the House?

Posted on Sep 16, 2021

According to Statista, about 80% of married couples own a home together. Divorce, for this reason, often involves couples figuring out how to split a property they used to share. Here’s what you need to know about how homes, divorce, and mortgages impact each other.

Who Really Owns the Home?

Property division is complicated, and the rules surrounding divorce and homes vary state by state.

In community property states, each spouse (assuming the home was co-owned) is entitled to 50% of the home’s value. Texas and California are examples of community property states.
In equitable distribution states, you or the court decide on a fair distribution of assets. If the court feels that one spouse is more employable or educated, they might receive fewer assets since it’s easier for them to earn more after the divorce. If the split happened because of infidelity, then the cheating spouse might receive a lower percentage of its value. Most states follow equitable distribution.

Usually if a married couple owns a home, they are co-owners and both names are on the mortgage - but in cases where this isn’t true, this can also impact the division of assets.

However, homes are considered marital assets so even if one person had nothing to do with paying the mortgage or maintaining the home, they may still be entitled to a portion of the assets.

Do you Need to Sell the House in a Divorce?

You don’t need to sell the home in a divorce, but many couples end up doing so because it reduces complications.

It’s up to you: In any divorce situation, it’s legal - and acceptable - to divide assets privately, without the assistance of lawyers and courts. You could, for example, decide on your own that one spouse gets the entire house because they had bought it and paid off the mortgage before the marriage.

Because divorces are often highly emotional events, though, not every couple feels like they can handle this task in a fair and equitable manner - which is why it’s often necessary to involve divorce lawyers and judges.

Leaving someone else in charge of making a mortgage payment can also lead to stressful situations, cautions Director of Mortgage Mike Mikhail. "Even if the other spouse communicated that 'I want you to stay in the home with the kids, I’m going to make the mortgage payments, don't worry' - I would move forward with caution and verify that," he advises. "If that individual does not make those mortgage payments, then after 90 days it could start the foreclosure status - and the family in that home could be in a really difficult situation."

Divorce buyout of home

If one spouse decides to keep the home while the other leaves, the staying spouse will likely need to pay out the leaving spouse. If they are not selling the home, then it will be necessary to obtain an appraisal in order to determine how much they are owed (since the home’s current price would be different than the price it was purchased for, due to appreciation).

Once they know how much the home is worth, they can arrange a divorce mortgage buyout. If the home is worth $300,000 and each spouse has 50% interest, then staying may involve paying the leaving spouse $150,000. Although this payout doesn’t need to be cash - the cost can be offset with other marital assets, like cars, that the other spouse can keep - for many the cost is too much to bear.

A few things to keep in mind:

In a hot market, appraisals can come in lower than what a home would receive on the open market. If you’re the spouse accepting the buyout money, you may ultimately receive less than you would if the home was sold - and you may want it to go to the open market. However, it’s very difficult to force a sale during a divorce so long as the remaining spouse is willing to pay out. You would need to switch from being joint tenants to tenants in common.

When You Can't Decide on Your Own

If the spouses can't degree on how the property should be split, the decision can go to court.

If both spouses want to reside in the home and there are children involved, the primary custodian is more likely to be granted residence - but not always. The general outlook of the court is that it wants to foster stability for kids.

The other important factor is financial well being. If one spouse is better suited for a buyout, the house may go to the other spouse - and the court will determine the appropriate buyout amount.

Mortgage after Divorce

If you’ve co-signed a mortgage and are now going through a divorce, you are now in a tenuous situation where your ex-spouse can stop making their portion of the payments - but you’ll still be on the hook for payment if you want to avoid foreclosure.

"If both parties are on the mortgage loan, then those two individuals are going to be responsible for the repayment of that loan," explains Mikhail. "If they miss a payment - if it goes more than 30 days late - then it gets reported as a late payment on their credit, and that’s going to impact both of their credit scores."

If your name is on the loan, you are legally responsible for making sure the payments are made. And if your name is on the loan - even if you’re not living in the home yourself - it will appear in your credit history.

Even if you and your ex-spouse have a very amicable relationship and they agree to pay for everything, having your name on the loan exposes you to financial risk if something were to happen to them (an accident, job loss, etc).

Additionally, if your name is on the mortgage - but you want to move out - you might struggle to get approved for another home loan. A lender may view you as having too high a debt-to-income ratio already (even if your spouse is taking responsibility of the mortgage payments).

Disadvantages to staying on the mortgage if you’re not living in the home:

Your credit can be penalized if the other person opts to not pay their half
You can be stuck paying for the entire mortgage amount if something prevents them from doing so
You may find it more challenging to qualify for credit/loans since lenders will consider this debt for determining your debt-to-income ratio.
Your home could be used as collateral to settle the other person’s debt (example: bankruptcy)

Removing Spouse from Mortgage After Divorce

One of the easiest ways to remove your spouse (or ex-spouse) from the mortgage is refinancing. When you refinance a home loan, you essentially receive a new mortgage agreement - you will likely receive a new term length and loan rate as well. Once you refinance, you can opt to make the new mortgage in one person’s name only.

One of the major drawbacks to refinancing is that it’s expensive (2-6% of the loan amount), but you might make some of this money back if you’re able to secure a lower rate than you had before.

The best time to refinance for divorce is before you’re actually divorced - once you have to report to the mortgage lender that you’re no longer married, it can affect your monthly debt ratio - and it may be more difficult to qualify for your home.

For example: if spouses separate and the one who leaves the home is paid child support, for that spouse it will count as income, but for the spouse that stays in the home - and is looking to refinance - paying out child support can count as debt and impact their debt/income ratio.

"The challenge for refinancing is that whoever’s taking over ownership of the property has to show that they can qualify on their own," notes Mikhail. "Instead of having two incomes to support the loan, now there’s only one. Depending on how big that outstanding balance is, that individual may or may not qualify on their own. In that instance, they may need to look for another co-borrower or ask a family member for a gift to come up with a larger down payment to try and reduce the loan amount. But the best course of action is you want to get the other individual off the mortgage and off the title."

Beyond the Mortgage

Title

If you’re keeping the home, you’ll need to get your ex-spouse’s name off the title. You can do this by filing a quitclaim deed: this transfers their legal interest in the property to you.

Taxes

When you sell a home in a divorce, you may need to pay what’s known as the long-term Capital Gains Tax. Capital Gains tax rules can be confusing, especially in a divorce. This is a tax on profit you have to pay when you’re selling a long-term investment (such as stocks, but can also apply to property). However, married couples receive a $500,000 profit exemption, while everyone else receives a $250,000 profit exemption, so long as you've lived in your home for at least two years.

If you sell before you reach the two-year mark, you pay the short-term capital gains tax - and the rate you pay (up to 37%) is a bracket determined by your income. If this is the case, you can opt to temporarily retain co-ownership of the home, while setting a deferred sell date for later (once you’re not going to be hit with high taxes).

Divorce and Mortgage: What Happens to the House?

Who Really Owns the Home?