Can’t Refinance After Divorce? We Have Solutions
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August 1, 2023

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Divorce is already unpleasant enough and financial stress on top of that is enough to become overbearing. Particularly stress over dividing up your shared home’s value.

But, for many reasons, as you dig into the process you may find yourself saying, “What happens if I can’t refinance after a divorce?”

Situations such as bad or low credit, not enough individual income, or the home’s condition could all affect your ability to refinance.

Here are alternatives if one party wants to stay in the home.

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Pull money from savings, investments, or retirement

Although it’s the most obvious solution, pulling out of liquid reserves could be a tricky option.

For example, you could have $500,000 in stocks and bonds and $300,000 in home equity, equalling $800,000 in assets. Each spouse would be entitled to $400,000.

One spouse could simply be paid out $400,000 out of the stocks and bonds account and call it a day. You wouldn’t have to pull equity out of the home.

There are complications, of course. The good news is that you can transfer stocks and bonds and even use a retirement account for the payout without penalty in some cases.

But liquid (and semi-liquid) assets can give you access to the cash you need in lieu of home equity and resolve this particular issue without incurring closing costs or a higher interest rate.

Win-win if you can manage it.

Get a HELOC for the divorce settlement

A divorce-settlement HELOC offers a great advantage to many divorcing couples, enabling you to access the equity you need without having to sell the home.

A HELOC puts your equity into a line of credit that works like a credit card: you only use what you need and then pay it back—which may or may not be a convenient option for divorcing couples.

If selling the home or a cash-out refinance doesn’t work for your situation; consider a HELOC—through which you might be able to access up to 100% of your home’s current value while incurring minimal closing costs.

It’s also quicker than selling the home or getting a cash-out refi. In a matter of weeks, you could have the funds readily available for the payout.

Qualify for your HELOC today.

Keep the home, move out, rent it, and split the rental income

Like the first option mentioned in the article (dissolving assets to pay for the equity difference), this choice comes with many possible pitfalls.

  • Both parties might have to agree to continue to work together to maintain the investment and administer the property.
  • Both parties remain on the existing loan and are liable for payments.
  • The divorce agreement needs to specifically determine who is responsible for making the mortgage payment
  • Alternatively, the divorce settlement might require both parties to pay half of the monthly mortgage payment.
  • It may take time to generate enough rental income to cover the amount necessary for the other spouse

Needless to say, some divorcing couples can manage these sorts of arrangements, and some cannot.

Like some other options we’ve listed, the main advantage here is that you get to keep your interest rate which will likely be lower than if you were to refinance.

It also doesn’t have to be a permanent situation—once mortgage rates have dropped, you can choose to refinance or sell at that time.

Of course, there’s no telling when rates might drop sufficiently, and both of you will have to agree when the time is right for a new mortgage or to sell.

Look into owner-occupied hard money loans

Hard money loans, also known as private money loans, are typically used for investments or other business purposes. An owner-occupied hard money loan is taken out on your primary residence. In this case, it would be the home formerly shared with your ex-spouse.

Private lenders often have more flexible guidelines for loan approval than banks or conventional lenders. So this could be the option for you if you couldn’t get approved for refinancing conventionally.

Because these lenders are setting their own qualifications, they’ll assess your situation and determine the terms of a loan. You could then use that loan to pay out the spouse and be done with that aspect of the divorce. Just be sure to have a plan for repaying the hard money loan.

Submit your owner-occupied hard money loan scenario.

One partner pays for the house

Depending on the post-divorce relationship and other circumstances, one spouse could continue paying or contributing to the mortgage on the shared house. This may be easier to negotiate if there are kids involved who will continue to live in the home.

The co-parent may voluntarily wish to ensure the stability and welfare of their children’s home. Otherwise, an outcome could be mediated in court, especially if spousal or child support is already a part of the discussion.

Sell the home and split the proceeds

This may be a last resort if one spouse wishes to remain in the home but doesn’t have a way to access the cash necessary on their own.

A home sale formally severs ties between spouses and enables the profits to be shared, affording you the opportunity to both to acquire a new property that hopefully brings you joy and fits your new financial means.

Although selling a home may appear daunting, surveys reveal that only 25% of individuals felt a sense of longing for their former residence. Most people discover new spaces to cherish, often finding greater satisfaction in their new abode compared to the last.

Refinancing after divorce FAQs

How do you remove the ex-spouse from the title without a refinance?

The names listed on the home’s title indicate the legal owners of the property—so it’s possible for someone to be on the title without being on the mortgage.

Removing someone from the title can be accomplished through one of two methods:
1. Quitclaim deed: You can request your ex-spouse to sign a quitclaim deed, transferring their ownership of the property to you
2. Sell the home: Selling the home will eliminate the current ownership structure

How do you remove the ex-spouse from the mortgage without a refinance?

Loan assumption is a potential solution. By taking over the mortgage, you become the sole borrower, assuming full responsibility for the loan. This is often only an option on FHA, VA, and USDA loans. The existing terms and interest rate remain unchanged, offering protection for your credit and finances if your ex-spouse fails to make payments.

Second, a loan modification can modify the terms of a mortgage loan without refinancing. Theoretically, it could also help lower interest rates or extend repayment periods to make the loan more affordable.

Usually, modifications are granted in cases of financial hardship, but some lenders may consider divorce or legal separation as a valid reason.

Why would a divorce settlement refinance get denied?

● If you don’t have enough equity in the home such as if your property value falls
● If your individual credit and income aren’t enough to qualify for the refinance
● If the home doesn’t pass the appraisal in which case you could try to repair the problem and reapply for refinance
● If your payment history is inconsistent

Can both parties stay on the mortgage after divorce?

If you make the decision to co-own your home with your ex-partner, it means both of you will remain on the deed and are jointly responsible for the mortgage payments.

Needless to say, this arrangement necessitates a certain level of coordination between both exes. Make sure the benefits outweigh the drawbacks.

What are the risks for the departing spouse if they are still on the mortgage (even if removed from the title)?

Even after divorcing, if both your name and your ex-spouse’s name continue to be on a mortgage—your marriage might be over, but your financial obligation remains.

As long as both of you are listed as borrowers, the lender holds both parties responsible for the debt.

What happens if I can’t refinance after divorce—the bottom line

When faced with the challenge of not being able to refinance after a divorce, it’s important to explore alternative options.

While any process you chose has the potential to be difficult, it could instead work out smoothly to both your benefits. Embracing new spaces and opportunities can lead to greater satisfaction and financial stability for everyone.

Find out if you qualify to refinance 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.

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