How does your divorce settlement impact your mortgage?

Determining how to divide marital assets is the central focus of many divorce cases. Often, a Pennsylvania couple’s home represents the most valuable asset and the largest investment. Dividing that investment’s equity can be tricky, and it is an area in which many couples make significant errors. Understanding the impact that a divorce settlement will have on a mortgage is essential to avoiding a negative outcome.

For many couples, the handling of the family home during a divorce is simple. One spouse retains the property, while the other is paid his or her share of the equity. In some cases, the spouse who will keep the house refinances in order to have the cash to pay off his or her ex. For many couples, however, this is simply not an option.

Mortgage lenders have every interest in ensuring that their loans are repaid. When a couple divorces, the parties listed on the mortgage do not automatically change. The lender will keep both spouses listed, so that there are two individuals to pursue in the event of nonpayment. Even when one spouse applies to refinance the loan in his or her own name, that request is often denied, especially when the applicant does not have an income that would suggest that repayment is likely.

This scenario leaves the party who did not retain the home in a difficult position. He or she no longer has any form of legal interest in the property but remains listed as being responsible for the payments. If payments are late or foreclosure occurs, there will be damage to that party’s credit. To add insult to injury, he or she is also likely to encounter difficulty in obtaining a new mortgage, as the existing loan will show as a financial obligation.

The best way to avoid these unpleasant outcomes is to gain a full understanding of financial ramifications prior to beginning divorce settlement negotiations. If dividing the equity in the family home is going to put one or both parties at a financial disadvantage, it may be worthwhile to explore other options. For some Pennsylvania couples, selling the home and dividing the proceeds may be a more sound financial decision.

Source: The New York Times, “Divorce and the Shared Mortgage“, Lisa Prevost, Oct. 30, 2015