Why refinancing matters after a divorce
A divorce decree can say who keeps the house, but it doesn't change the mortgage. If both names are on the loan, both of you stay responsible for it until it's paid off or refinanced. Late payments can affect both credit reports.
Refinancing pays off the joint loan and replaces it with a new one in your name. That gives your former spouse a clean break and gives you full control of the loan.
The steps, in order
- Get your final decree or signed settlement agreement. Lenders usually need it to see who owns the home and who owes what.
- Check what you qualify for on your own income and debts.
- Agree on the buyout amount, if one is owed, and how it will be paid.
- Apply, lock your rate and send your documents.
- Complete the appraisal or valuation and underwriting.
- Close, and record any deed change so the title matches the new loan.
Qualifying on one income
The new loan is judged on your finances alone. Lenders look at your income, credit score, monthly debts and the home's value. Your debt-to-income ratio, or DTI, compares your monthly debts, including the new house payment, with your gross monthly income.
If you'll pay alimony or child support, that payment usually counts as a debt. If you'll receive it, it may count as income.
Counting alimony and child support as income
Support you receive can often count toward qualifying. Lenders generally want to see it in a court order or settlement agreement, proof that it's being paid, and a reasonable expectation that it will continue for a while. Rules vary by loan program, so ask your loan consultant what your file needs.
How a buyout works
If you're keeping the house, your former spouse may be owed a share of the equity. A cash-out refinance can pay off the old loan and fund that buyout in one step.
Hypothetical example: the home is worth $500,000 and the loan balance is $250,000, so equity is $250,000. A 50% buyout would be $125,000. A new loan of $375,000 would pay off the old $250,000 and the $125,000 buyout, for a loan-to-value of 75%. This example ignores closing costs and prepaids. Your actual amount depends on your agreement, the home's value and program limits.
Taking your ex off the title
The loan and the title are separate. Your former spouse may need to sign a quitclaim deed or other document to remove their name from the title. This is often handled at or before closing. A real estate attorney or your settlement agent can explain what's required where you live.
What to gather
- Your divorce decree or settlement agreement, with all pages
- Recent pay stubs and W-2s, or tax returns if you're self-employed
- Two months of bank and asset statements
- Proof of support payments received or paid, if any
- Your current mortgage statement and homeowners insurance information