My Perfect Mortgage
Divorce Refinance Alternatives Guide
5 minute read
August 1, 2023

Resolving what to do with the family home is one of the biggest aspects of most divorce proceedings. 

One of the best and most common ways a divorce settlement can be resolved is through refinancing the mortgage. It’s an arguably straightforward way to gain access to the funds needed to pay the spouse who is not remaining in the home their portion of the equity.

But, there can be some obstacles to being approved for a refinance. And while there are also options to improve your chances for approval, sometimes it just isn’t possible.

Let’s look at the alternatives to refinancing after divorce. 

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Reasons why a refinance might get denied after a divorce

When it comes to refinancing after a divorce, various factors can potentially hinder the process.

Credit history

One of these factors is credit history, as a poor credit score may make it difficult to secure refinancing options. You can do certain things to enhance your credit score, but almost all of these will likely take time to put into action and take effect.

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Income issues

Divorced individuals may struggle to qualify for a new loan based solely on their own income. Most couples qualify for a home loan by using both incomes. After a split, significantly reducing that income total may push the newly single person below qualifying levels.

Condition of the home

Finally, the condition of the house can also impact the ability to refinance, especially if the property is in bad shape or needs significant repairs and/or renovations. Before a lender can approve a refinancing, they may want to make sure the value of the home is worth what the new mortgage will be.

Options to help qualify for a refinance

If you find yourself in a situation where your previous application has been declined, don't give up hope yet. There are a few options you could consider that might increase your chances of being approved when you decide to reapply.

Find a co-signer

One option is to find a co-borrower who can join the application with you. This can make a significant difference as their income and credit score can help them qualify for the loan or other financial assistance they need.

With the support of a co-signer, you can present a stronger application and demonstrate to the lender that you have a reliable source of repayment. Remember, it's important to choose someone you trust and who is willing to take on the responsibility of being a co-borrower.

Finance repairs

In the midst of a personal financial crisis—like a sudden reduction of income and a rise in divorce expenses—there may not be extra funds to fix up the house.

However, with an FHA 203k loan, you can refinance the home while rolling repair costs into the refi.

The 203k loan allows you to get FHA financing even if the home’s condition would normally prohibit it from the loan.

See if you qualify for an FHA 203k rehab loan.

Other options instead of refinance

You can also look into options that circumvent the refinance option entirely. Here are three viable choices that could be considered.

HELOC for divorce

Another consideration is applying for a Home Equity Line of Credit (HELOC) as a means to secure funds for your divorce settlement.

A HELOC can provide you with a flexible borrowing solution backed by the equity in your home, allowing you to access the necessary funds while taking advantage of potentially lower interest rates.

Owner-occupied hard money loan

For many people who don’t have access to traditional means of borrowing, an owner-occupied hard money loan might be the way to go.

This type of loan allows you to use your home as collateral, providing the necessary funds you need while taking into account your ownership status and specific financial situation.

Hard money lenders will often have much more flexibility in how loans can be approved or how they can be resolved.

It's a viable option to explore when traditional refinancing isn't feasible or accessible.

Submit your owner-occupied hard money loan scenario.

Finding the funds elsewhere that equal the owed equity

One of the primary reasons why individuals consider refinancing after a divorce is to settle the equity payment owed to one spouse.

For instance, if you and your spouse have $100,000 in home equity and $200,000 in savings and retirement, each spouse is entitled to $150,000. Simply liquidate or transfer $150,000 from cash and investment accounts to the spouse and avoid a refinance altogether.

This approach can be a viable alternative—especially if it ensures you can retain a better interest rate on your original mortgage.

Consider selling

To resolve a divorce settlement, it might be beneficial to consider the possibility of selling the shared property as a means to fairly divide the accrued equity.

While that may seem like a difficult decision, sometimes there are no other viable alternatives available.

On the positive side, selling the home often provides an opportunity for both parties to receive their rightful share and move forward with their separate lives in a more equitable manner.

And by doing so, it ensures that the division of assets is transparent and minimizes the chances of any lingering conflicts or disputes in the future.

There are alternatives to refinancing after a divorce

When it comes to handling your property after a divorce, there are several viable alternatives to consider if you find out traditional refinancing isn’t an option.

However, you may be eligible for a refinance, even if you've been denied previously. Check your refinance eligibility again with our lender network.

Check your refinance eligibility here.

Our advise is based on experience in the mortgage industry and we are dedicated to helping you achieve your goal of owning a home. We may receive compensation from partner banks when you view mortgage rates listed on our website.