Let's face it, couples don't get married knowing they're going to divorce later on. When a couple finds there are irreconcilable differences, often a divorce is the only solution. And if there's a mortgage involved, there are some things they need to know.
First, most couples need two incomes in order to qualify for the home they want. That means both need to be on the note for the home. But if the unfortunate happens, then there are some legal channels that need to be addressed.
The first thing a lender wants to see is a copy of the divorce decree. Not just the decree, but the document with everyone's signature appearing, especially from the judge. The decree will list who is responsible for which payments. These payments include credit cards, student loans and other obligations. Each person will be assigned who is responsible for which debts. They sign the decree and go on their merry way. If there is a mortgage involved, typically one person is responsible for paying the old mortgage. Many times the home is sold and each person receives its share. But when one individual wants to keep the house forcing the other to leave, there is still an obligation.
When a newly divorced individual who no longer occupies the home wants to buy a new home in which to live, there is still the old mortgage payment showing up on the credit report. That can most often impact the ability to qualify for a new mortgage to buy a home because there are two mortgage obligations. Regardless of what the divorce decree states, it's not going to erase the monthly mortgage debt when calculating debt ratios.
The only way to get the non-occupant off the mortgage as well as title is for the remaining occupant to refinance the note and qualify on his or her own. Again, if the couple needed two incomes to qualify for the original mortgage, a refinance might not be possible due to the reduced qualifying income. Qualifying will start all over again as it relates to employment, income and credit.
What about a separation? First, a separation must be a legal one, not where one spouse decides to move out. The separation agreement must also spell out who is responsible for what. In addition, lenders may want to see that the remaining spouse has the ability to responsibly repay the debt. In this instance, lenders may want to see two years of on-time payments before releasing someone's obligation from a mortgage.
Finally, just because a decree says the remaining spouse is responsible for the mortgage and releasing the non-occupant, that doesn't mean the lender will agree to those same terms. The lender qualified the mortgage with two applicants and the decree doesn't automatically release one spouse from the obligation.
Mortgages and divorce can get into some pretty tricky legal territory but should be taken seriously when a couple decide to split. Legal advice is needed here.
