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What Happens If I Can’t Refinance After Divorce?

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What Happens If I Can’t Refinance After Divorce?

Going through a divorce can be an emotionally and financially difficult time. One of the many things you may need to figure out is what to do about any joint debts you share with your former spouse, especially the mortgage on your home.

Refinancing the loan in your own name may seem like the ideal solution, but this option isn’t always feasible post-divorce. So what happens if you can’t qualify to refinance your mortgage after your marriage ends?

The Short-Term Options

Keep Paying the Existing Mortgage As part of your divorce decree, the court may order one spouse to take over sole financial responsibility for the mortgage.

If your ex-spouse was awarded the house in the settlement, they would need to either refinance the home themselves or continue making the existing mortgage payments if they can’t qualify for a new loan.

You may also work out your own informal agreement where one ex-spouse keeps paying the mortgage temporarily after the divorce, even if they aren’t living in the home. This arrangement gives them time to improve their credit or financial situation in order to eventually qualify for a refinance.

Apply for Loss Mitigation

Assistance If neither you nor your former partner can afford to pay the mortgage alone, you may be able to request special assistance from your lender to prevent foreclosure. This is known as loss mitigation.

Common loss mitigation options include:

Forbearance – Your mortgage payments are temporarily reduced or suspended for a set period of time.

Loan modification – The terms of your original mortgage are permanently changed. For example, extending the repayment period to lower your monthly payments.

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Short sale – Selling the home for less than what you currently owe on the mortgage, which requires approval from the lender.

These programs won’t get either borrower’s name off the mortgage, but they can help avoid foreclosure in the short term.

The Long-Term Solutions

Refinance in Your Own Name Ideally, the spouse who was awarded the house in the divorce settlement would be able to eventually refinance the home mortgage into their own name only. This takes some financial planning and responsibility.

To qualify for a refinance, most lenders require:

  • A credit score of at least 620 or higher
  • A debt-to-income ratio lower than 50%
  • Several months of on-time mortgage payments
  • The ability to pay closing costs out of pocket

Making mortgage payments on time and paying down other debts can slowly help improve your chances of refinancing. You may also look into FHA, USDA, or VA loans which offer more leniency for borrowers with financial hardships.

Sell the Home

If neither ex-spouse has the financial means to repay the mortgage on their own, selling the family home may be the only realistic option. This eliminates the debt completely and provides both individuals a clean slate to move forward.

However, selling can also be emotionally taxing if you hoped to remain in the home. It also may not fetch an optimal sale price in the rushed circumstances of a divorce. And if market value is less than what you owe the lender, that means bringing money to close to pay off the mortgage shortfall.

The proceeds from a sale can be divided as part of your final divorce settlement. Or if you shared ownership of other investment properties or assets, these could be liquidated instead and allow one spouse to keep the house.

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File for Bankruptcy

In extreme cases where the mortgage debt far outweighs either spouse’s income, declaring Chapter 7 or Chapter 13 bankruptcy may be a last resort. This legally eliminates or restructures certain outstanding debts. However, it will also badly damage your credit for years.

This option should only be considered if refinancing and selling the home are impossible. Consult an attorney who understands the impact bankruptcy can have under your state’s divorce laws regarding shared debts.

There may also be bankruptcy alternatives like debt consolidation loans which are less damaging to your credit score long-term.

Transfer the Property Deed

Only Another option if you absolutely need to get your name off the mortgage quickly is to sign over the deed to the home. This transfers ownership, but doesn’t release you from the underlying loan obligation.

This risky move makes you vulnerable if the remaining borrower defaults on the mortgage. As far as the lender knows, you’re still on the hook for payments. Additionally, you give up all rights to the home itself. Consult an attorney before signing over your property deed without formally refinancing the joint mortgage.

Make Smart Choices Today For Tomorrow’s Financial Health

The period following a divorce presents numerous financial unknowns. Shared debts that once seemed minimal can quickly become burdensome during this transitional phase. If your name remains tied to a mortgage you can no longer afford, understand your options to avoid foreclosure.

With some strategic planning and compromise around selling or keeping the family home, it may be possible to eventually qualify to refinance the loan into one spouse’s name only.

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This simplifies money matters moving forward as you each embark on new chapters in life. Think through both short and long-term solutions before making any hasty property transfer decisions.

Above all, acknowledge this stretch of uncertainty and hardship will pass. Maintain close communication with lenders, attorneys, a financial advisor, or credit counseling agency.

Their input can help safeguard your legal rights and navigate this financial turning point with greater wisdom. Despite feeling overwhelmed in the depth of divorce, have faith in brighter days ahead.

The Key Takeaways: What Now?

– Explore loss mitigation programs offered by lenders if unable to afford the mortgage immediately after divorce. This helps avoid foreclosure.

– Improve your credit, income, and debt profile over time so you can eventually qualify to refinance the home into your name only.

– Selling the home or liquidating other shared assets may be necessary to eliminate mortgage debt and split proceeds fairly.

– Transferring the property deed alone still leaves you obligated on the underlying loan. Seek legal counsel on this option.

– In dire circumstances, bankruptcy instantly eliminates or restructures debts but severely damages credit.

Divorce presents complex financial twists and turns, but pragmatic solutions exist. With strategic planning, compromise, and time, you can regain solid financial footing post-divorce.

The key is making informed money moves so that mortgage debt doesn’t derail your new path forward. Stay positive and take advantage of professional guidance. You’ve got this!

Also Read: What is Pro Se Divorce? Everything You Need To Know

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