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Managing Credit and the Mortgage During a Divorce

June 19, 2023

credit and mortgage during a divorce

It can be a challenging and overwhelming process if you are facing a divorce and trying to separate the marital home. It is essential to take specific steps to ensure that the separation goes smoothly and does not damage your credit.

Assuming a relatively amicable divorce process, here are some tips that can help you navigate the process.

Decide who will get the marital real estate.

Evaluating the financial contributions of each spouse towards the property’s acquisition, maintenance, and improvement is crucial. Additionally, the needs of any children involved, such as their proximity to schools or established support networks, should be taken into account.

Other relevant aspects to consider may include each spouse’s earning capacity, health, and the potential impact of the property’s division on their future financial stability. Based on the ability to repay the financing of the home, decide who will be keeping the home first.

Get pre-approved to refinance the marital home.

Before the divorce, request that the spouse who plans to keep the marital home gets pre-approved for a mortgage. This step ensures the person taking on the home can qualify for financing so the departing spouse has assurances. Getting the spouse off the mortgage is a great step in the right direction.

Like in purchase applications, the buyer will often get pre-approved to buy a home in a given price range. This allows the seller to rely on a trusted party that the buyer can qualify for the home being bought.

In a refinance, the person taking the marital home can get pre-approved for the refinance. This assures the departing spouse that the ex can take responsibility for the mortgage. This allows the departing spouse to move on with their life financially.

Refinance the home loan before the divorce is final.

In most cases, the home is refinanced after the divorce. Assuming things are amicable, you can refinance the mortgage before the divorce is final. This removes the departing spouse from the note to pursue other financing.

The departing spouse can stay on the title until the divorce is final. Staying on title secures their interest in the property. The note defines who is obligated to pay the mortgage payment. Who is on the deed defines who owns the property.

In some cases, mortgage assumptions are possible if interest rates are higher. This is usually with FHA or VA mortgages. This approach gets the debt off the departing spouse’s credit report. This allows both parties to move on with less financial strain.

Use cash-out from a refinance to buy out equity.

Special underwriting guidelines regarding divorces allow you to buy out your ex-spouse’s equity with fewer underwriting limitations. This can be used to settle the distribution of marital property.

This buyout is done with cash-out from a refinance without being subject to cash-out limitations. In normal cash-out transactions, the loan amount is limited to 80% of the home’s value. The settlement amount of the home will not be subject to cash-out limitations if it is itemized in the divorce.

Use the divorce decree to remove the ex-spouse from the deed.

This is a very technical one. In most states, the divorce decree can be used for conveyance from the deed if the proper verbiage is used. This can be used in lieu of a quitclaim deed. This is useful if the divorce is final and no longer amicable. It also helps when contact with the ex-spouse is not reasonable.

This usually requires that the divorce decree be specific to the conveyance and contain the legal description of the property.

Call each creditor to split all other debts and obligations.

Whoever gets the credit cards and auto loans must be reallocated. In other words, joint accounts must be called and split into the respective spouse’s name. You will need to call each account and remove or transfer the debts according to who plans to keep them.

Check your credit before and after the divorce.

Make sure to check your credit before and after the divorce to ensure that debts on your credit belong to you. Joint debts may continue to be reported, even if they are no longer your responsibility as per the divorce decree. Check your credit to ensure that debts that are no longer your responsibility have been canceled.

Any late payment on an account on your credit will lower your credit score. Joint accounts, which the divorce decree says aren’t yours, but reports on your credit will make no difference – this is why it’s important to update accounts to report solely to the appropriate owner. Keeping your credit top-notch through this process is important as great credit scores make a big impact.

By following these tips, you can make the process of separating the marital home during a divorce less daunting and reduce the risk of damaging your credit.

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