Death and divorce are both troubling circumstances we sometimes face. It’s not a fun topic to think about, but if you’re prepared, the transition will be that much easier and will allow you to focus on family instead of your house or mortgage. In the unfortunate event that you’re left with a mortgage after a death or a divorce, you may wonder what will become of your home? And what sort of next steps do you need to consider?
But don’t worry, there’s help and plenty of resources for such moments in life.
First and foremost, seek out legal counsel as soon as possible. There are many factors at play in the event of death or divorce that make each situation unique and oftentimes complicated — which justifies a unique action plan prepared by an experienced professional.
By giving as much advance notice as possible, you’ll have more time to survey your options and prepare. Below are some important questions to consider for each circumstance.
If you are anticipating staying in the home, you may be able to refinance to get a lower interest rate or mortgage insurance to make your payment more affordable. Or, you can sell the home and downsize to something you can afford.
If you’re listed as an inheritor, then you may be able to assume responsibility of the property without consideration of Ability to Repay (ATR).
That being said, you’d need to take the steps to decide whether or not you want to keep the home, or sell it.
But if you were living in the home, and you’re not listed on the mortgage, or as an inheritor of the property, then your options may be limited. You’d need to seek the counsel of a lawyer to know what those options are.
In some rare cases, it’s possible to assume a mortgage. But first, adequate preparation and research is important. When you assume a mortgage, it’s because you’re buying the previous owner’s home (a relative, for example) as well as acquiring their debts. This isn’t a common choice, though, since it requires you to take on someone else’s debt. But it is a potential option for some. Your lawyer will be able to help determine if that’s an option for you.
The future of your home and mortgage can depend on the relationship between you and your separated spouse. For example, if you’re both civil about the separation, choosing what to do with the house and mortgage may be easier to deal with.
Based off your answers to the above questions, there are three main options:
Please note, these scenarios only apply if you and your spouse are co-borrowers on the home loan. If one of you is not on the loan, then that person may have more limited options and would need to seek legal counsel to determine the next steps.
If the borrower isn’t able to – or doesn’t want to – stay in the home, they can sell the home and try to maximize their profit.
Typically, once the house sells, you and your spouse would split the profits based on the settlement. It’s important you work with a qualified real estate agent to avoid common mistakes when listing your home that can lead to possible decreased profits. An agent will also help you determine what the net proceeds will be after all expenses are taken into consideration.
A buyout is when one spouse releases his or her interest in the house in exchange for cash.
In this scenario, it’s important to work with a mortgage banker to determine your ability (or your spouse’s) to refinance the loan. Typically, the original mortgage is paid, and then a new loan is made where only one spouse is listed on the loan and the title of the home. The cash proceeds from the loan are then available to “buyout” your spouse.
Sometimes it makes more sense for the borrower to continue to co-own the home.
These situations usually have very clear terms and arrangements to help mitigate any potential issues down the road. Agreements for this scenario can have a predetermined amount of time for co-ownership or can last indefinitely. Sometimes couples going through a divorce, for example, may choose this option if they plan to use the house as a potential source of income (renting out, etc.).
For more information on how to deal with a mortgage due to death or divorce, it’s important to reach out to both a legal, and mortgage professional, to determine your next steps.