One of the most pressing issues for couples going through a divorce is what to do with the family home.
If you or your ex-spouse want to keep the home, refinancing is the best solution for removing one party from the mortgage and restructuring the loan to fit your new needs.
What's in this article?
In this guide, we will help you navigate the steps to refinancing after a divorce from start to finish, including potential challenges and tips for a smoother process.
Is it necessary to refinance after a divorce?
Not all individuals are interested in keeping the family home following a divorce. Some couples choose to sell the property and split the proceeds.
However, there are certain circumstances in which refinancing a mortgage is the best solution, including the following.
One spouse wants to keep the home
Refinancing offers a solution if you or your ex-spouse want to keep the home and are financially capable of qualifying for a new mortgage.
One spouse can take out a new mortgage in their name and has the option to adjust the loan terms to fit their new financial situation.
You need to remove a spouse from the mortgage
If both of your names are on the mortgage, each of you is responsible for making the monthly mortgage payments on time.
Even if one spouse agrees to take over the payments independently, the other party remains liable—whether they live there or not.
Refinancing offers divorcing couples a clean financial break and legally transfers ownership to the remaining spouse.
You need to divide the equity in the home
In many instances, the spouse keeping the home must compensate the other for their share of the equity built up in the home.
Using a cash-out refinance, the spouse keeping the home can borrow against the equity and use those funds to settle the division of assets.
The remaining spouse also can use the funds to make home improvements or pay down debt.
Ready To Take Your Next Step?
Factors to consider before refinancing
The most important consideration for those wishing to keep the home is whether you qualify for a new mortgage.
Refinancing replaces your existing mortgage with a new one with a new rate and loan term.
Lenders will evaluate the following factors to determine a borrower’s eligibility.
Credit score and income
Divorce can impact your credit score and income situation.
Lenders will review your credit and income to determine whether you can comfortably afford the mortgage on your own.
Check your credit before applying with a lender to ensure all the information is accurate.
Debt-to-income ratio (DTI)
DTI shows lenders the percentage of your monthly income that goes toward monthly debts, such as a mortgage, credit cards or car loans.
This helps them gauge whether you can handle another debt obligation.
A DTI of 43% or lower is preferred, but this requirement varies by lender.
Current interest rates
Current mortgage interest rates can have a significant impact on one’s ability to refinance.
Lower rates can result in more affordable monthly payments, while higher rates probably increase the monthly payment.
How to refinance your home after a divorce
The refinance process doesn’t have to be complex.
Let’s take a look at the steps involved in refinancing after a divorce to help make the process as smooth and manageable as possible.
1. Review your divorce decree
Your divorce decree outlines your legal agreements with your ex-spouse, including how you’ll divide the property.
Carefully review the decree prior to refinancing to ensure compliance with the court’s decisions and avoid legal trouble.
2. Choose a refinance option
The next step is to decide which type of refinance works best for your situation.
Your two main options are a rate-and-term refinance or cash-out refinance:
- Rate-and-term refinance: If your goal is to remove your ex-spouse from the mortgage and adjust the interest rate and term length, a rate-and-term refinance may be your best option.
- Cash-out refinance: If you need to pay your ex-spouse their share of the home equity or settle any other financial obligations, a cash-out refinance allows you to take out a new, bigger mortgage and use the extra cash in any way you choose.
3. Reach out to a lender
Once you decide on the type of refinance you need to accomplish your goals, contact Compass Mortgage to determine whether you qualify.
Compass Mortgage reviews the following:
- Current interest rate
- Credit score
- Home’s value (confirmed with an appraisal)
- Equity in the home
We’ll then discuss your options and potential terms and guide you through each step of the process.
4. Apply for your loan
Finally, it’s time to apply for the mortgage!
This involves submitting all the requested documentation to your lender and completing a formal loan application.
The lender will review your financial information, verify your income and evaluate your creditworthiness.
5. Close on the refinance
The final step is closing, where you will sign your new mortgage documents and finalize the loan.
If you remove your ex-spouse from the mortgage, they may need to sign a legal document to give you full ownership of the home.
You will receive your funds at closing if you opt for a cash-out refinance.
Potential challenges and alternatives to refinancing after divorce
Refinancing can be the best solution for many following a divorce, but it’s important to understand the potential challenges you may face, including:
- Ex-spouses who won’t cooperate
- Unresolved legal issues
Be prepared to seek legal advice in these instances.
Additionally, if refinancing isn’t right for you, you may choose to sell the home or assume the existing mortgage, which will make one spouse responsible for the mortgage payments.
Tips for refinancing after a divorce
When deciding whether to refinance after a divorce, the most important step is to work with a divorce attorney and a trusted mortgage professional like Compass Mortgage.
These experts will be able to help you avoid legal troubles and determine whether refinancing is feasible based on your unique financial situation—and what you can do to improve your chances of approval.
Start the refinance process with Compass Mortgage
Compass Mortgage cares about your financing needs.
We are your partner and advocate throughout every step of the refinance process, helping you easily navigate your options.