0191: How to Refinance Your House in Divorce

Visit us at divorceandyourmoney.com for the #1 divorce resources in the USA and get personalized help. Learn about coaching services here.   Thank you for listening! Find a transcript of this episode below.   In this episode I want to discuss refinancing the house in the divorce process and some considerations that you need to be thinking about as part of this process. Now, whether you're the person who's going to be keeping my house or if you're the person giving it up, there's going to be some information in here that is going to be helpful for you. Another thing I just want to mention right off the bat is if you go to the store and you get the quick start guide, I have 9 or 10 episodes dedicated just to considerations regarding your house in divorce and there's a lot of great information in there. It's a whole section in the quickstart guide and if you haven't checked that out, definitely go and get it because only some of the episodes are here available wherever you listen to podcasts. But the vast majority of them with a lot of great information a part of the quickstart guide.   Now, what we're talking about in this episode is house refinancing. It's a very common topic that comes up on coaching calls almost every day. And what we're talking about is basically transferring the name of the house from one person to another but there is a mortgage involved. I'd say 9 out of 10 times you have a mortgage on a house, some people in their houses outright, but most of the time there's some sort of outstanding mortgage balance. And the question is how do you actually get that mortgage out of one person's name and onto another. And so the house could be in both of your names, both you and your spouse's name and you want to put it in just one person's name afterwards or it could be in one spouse's name and they want to transfer the home and the mortgage to the other spouses of name.   And the reason I want to talk about this topic is there's a lot of considerations and things you need to be thinking about today and implementing today to make sure that you're thinking about your future and you're thinking about the refinancing process properly because there's a lot of common knowledge that I share on pod or on the coaching calls that people don't really know and so I want to bring that up for all of you who are listening. I'm going to use some examples to clarify what is important in this process and to give you some nuggets to think about. So I'm going to use the example of a husband and wife couple and the husband or the house I should say, is in both of your names. Both the husband and the wife's name's on the house and guess what? Both the husband and the wife are on the mortgage.   Let's say you have some young kids and so it's going to be better you think for one of you to keep the house. We're going to use the stereotypical example of the mom staying at home with the kids or at least wanting to keep the house with the kids and having primary custody. So the husband in this just sake of example, I deal with everything in between, but for the sake of this example we're going to assume the husband wants to transfer the house and the mortgage to the wife's name and how that process is supposed to happen. And actually it's not a simple process. I'm going to get into some further descriptions on the wife or the mom in this case because it's going to be relevant in terms of whether or not you can refinance.   What you do when you refinance a mortgage is you're basically getting a new loan out, paying off the old loan and then just the new loan remains in place. So I'm going to give you an example. I'll use some very simple math, keep it easy. Let's say you have $100,000 of a mortgage on your house and both of your names, well we're going to give it out. In this example we're giving the mortgage to the wife and so as the wife or soon to be ex wife and soon to be custodian with the kids, that person has to get a new mortgage and they are going to have to refinance and pay off the old mortgage and get the new one. And so with the new one, they are probably going to have to get a mortgage for about $105,000. What I mean is there's going to be some fees and some expenses associated with getting the mortgage, but you have $100,000 outstanding. The wife is going to have to go to a mortgage lender and see if she can qualify and get a mortgage for $105,000. They'll take out $5,000 in fees and then what you're going to do is you're going to repay the mortgage with both your names on it. So it's going to be a zero balance. And then the wife is just going to have a mortgage in her name outstanding. Now, there's a lot to cover in that relatively straightforward example. So I want to dig into some details and some things that you should be thinking about if this is going to be an element of your divorce process. First and most importantly, and this is where almost everyone goes wrong that I talk to and doesn't think about, is if you're planning on refinancing a mortgage and just putting one person's name on that mortgage, that person needs to be able to qualify mortgage on their own. It means that person needs to have enough credit and enough income to qualify and fully pay off that new mortgage. Many people do not have this point. If you are trying to take the house yourself, you're going to need to refinance and get a mortgage in your name or if you're trying to give it to your spouse, you're going need to refinance and get a mortgage in your name. Often times the spouse who wants the house will not qualify for it because you not only need good credit, but also you will need income to prove that you can repay those funds.   So if you are a stay at home parent and have not had income and your only income is going to be potentially some form of spousal support, you may not qualify for refinancing the house or if your spouse has bad credit and they're about to take over the house, they may not qualify to refinance the mortgage in their name only. And if you are a bank you want to be certain that the person who's going to be taking this refinancing loan out can actually pay for it. Look at the time, well, you are married and both people's names are on the house. If you stop paying, the bank has the option and will not just the option, they will pursue both of you aggressively until they get their money back and there's two people that they can pursue and two people's assets and income and everything else that they can over.   Now, if you're making it just one person, well the risk to the bank is much higher because now there's only one person whose assets and income they can go over and try and take and so they're going to want to make sure that if that one person is only on the hook that that one person can repay for things. But if you don't, if you're a stay at home parent and you don't necessarily have a clear source of income for the foreseeable future of your refinancing time, then it is very likely that you won't be able to refinance the home and therefore won't be able to take your spouse's name off the home and therefore either going to have to sell the home or figure out another arrangement. There's a lot of risks to that and a lot of things you need to think about and conversely if you're on the other side of it.   Let's talk about the other side because I work with a wide variety of people in a wide variety of situations. Let's say you are the person who wants to take their name off the house and so your spouse is the one who's going to have to qualify for the mortgage. Well, there are some issues with that because if your spouse is unable to qualify for a house refinancing, you are putting yourself in a world of risk and potential liability if you leave your name on the house and the mortgage. And so here's what I'm getting at. Let's just say you come up with some great divorce settlement, you think you're pretty good and as part of the divorce settlement you write in my now ex spouse is going to be responsible for any future mortgage payments on the house, but we're not going to refinance it we'll leave it as is and keep both of our names on it.   Well, let's just say three years down the line something happens and your spouse misses a mortgage payment and then maybe starts missing two mortgage payments or three. All of a sudden you're going to be getting calls about mortgage payments being behind, your credit's going to fall substantially and you're going to put yourself into a lot of risk and liability for this outstanding mortgage that you should have refinanced or at least gotten rid of one way or another down the line later. And so there are some things for you to think about. I almost never encourage people to leave their names on the house if they're not living in it after divorce because it just presents too much risk down the line. But oftentimes you have to make sure your spouse can qualify for a that refinancing.   Now, I've talked a lot about some of the circumstances and situations and considerations as you think about refinancing your mortgage in divorce. The good news is now that you have a little bit of a handle on it, there's an easy solution to this whole thing that all of you, if this is going to be a question in your divorce, either you or your soon to be ex spouse needs to do this sooner over later. It's not hard. You contact a mortgage broker or a mortgage lender and you see if you will qualify for refinancing or you could say prequalify for a refinancing. You can't actually do this process in most cases until the divorce is signed. But you can find out if this process is actually feasible for you before that. And what do I mean? You do this, you contact a loan company. I don't endorse this company. I don't know much about them, but they advertise a lot so Quicken Loans.   Quicken Loans I see their ads all the time. You can contact Quicken Loans and say, "Hey, here's the situation. I'm about to get divorced. I want to make sure I can qualify to refinance for refinance my mortgage and put the house in my name as part of this process." They do this thousands of times a day with tens of thousands of people, they're very used to this conversation. You can go to them and they'll ask you for your information, your income, etc. And they'll say, "Hey, you can be approved up to X amount of mortgage." And so you can take that amount to them and they might say, "All is good. Yeah, I think this will work out for you. You're looking good." Or they'll say, "Actually, you don't meet the qualifications at all for what we require and this probably won't work out for you." And you have to go back to the drawing board or you go to the company that originally did your mortgage and contact them.   Whoever you want to contact, it takes an hour or two or whatever, but you apply and just say it's for preapproval to see if you can do this thing. You don't have to take it, there's usually no fee just to preapprove yourself. It's an hour or two of your time, very straightforward and if you meet the information they'll send you a document that says, "Yeah, you prequalify for this refinancing. Here's all the terms, here's the fees, everything laid out." It's usually on a couple pages and you're good to go and you know what your options are, whether or not you pursue it or not. Or if you go and you find out and you say, "Hey sorry, given the house, given your credit, given your income, given whatever their issue may be, you don't qualify for this refinancing." Well now you know your options in terms of the divorce process or if it's your spouse who's the one who needs to go through this process.   I would say, "Hey spouse, look, I'm happy to give you the house, but you need to just make sure that we can actually refinance it. Just go call this company or call one of these three companies to make sure that this process is doable." And so there are things to consider and you just go and get an answer. If the answer is yeah, you could refinance this mortgage, then you know the answer. If the answer is no, you can't refinance this mortgage, then you know that answer too and you can make an appropriate decision in terms of all of the other issues in your divorce process and really come up with a divorce settlement. The worst thing that I see, and I see this happen many times down the line, is when you have an idea in your head or you're deep in the negotiating process and you book a coaching call or whatever else and you say, "Hey, here's what we're going to do. Here's what we're thinking about. How does this sound?"   And I'll say, "Hey, this whole transferring the house and refinancing isn't as simple as it sounds. Have you been pre qualified yet? Have you contacted a mortgage broker?" And you'll say, "No." We'll say, "Hey, why don't you just take the next two days, I'm going to give you some homework, go contact a mortgage lender and see if this is actually feasible." And many times you are very surprised with the answer or what is required and you have to really adjust what you're thinking about. Now, it's not all bad news either. Maybe you find out that everything's on target and you're okay and you have the definitive answer and you're good. But the sooner that you can figure out and contact someone about a refinancing the better. The other thing I want to just toss out there is there are also other creative solutions when it comes to refinancing a house.   I've worked with some people where we can partially pay down the mortgage with retirement funds as part of this process and refinance a chunk of the mortgage and if you do a chunk of it, you're in good shape and can refinance or can come up with a creative solution. It really just depends on individual circumstances. One of the reasons I do this podcast is this stuff is complicated and oftentimes there's many different ways at looking at things and that's some of the things we get on coaching calls or with the people I work with on a longer term. But you could come up with some pretty interesting solutions down the line for things that you might not have thought about when it comes to the mortgage. And so the other thing when it comes to a refinancing, and as I said you should really contact some mortgage firms or some banks that provide mortgages and explain the situation. I promise you all of them have dealt with hundreds or thousands of divorces each year and are very familiar with the circumstances involved in the moving part of the process. There's nothing scary about it, it's just taking the time to do it. But you could be in a position where, well, let's just say using $100,000 mortgage that we were talking about before, they could say, "Hey, given your part time work and your income and whatever else, maybe you can only refinance $40,000 of that mortgage." Well maybe that's sufficient because if you have $60,000 on other assets, you might be able to pay off with using a retirement plan or something else. There are ways to structure it so it's tax advantageous if you know the laws and work with an accountant or work with me or whatever else, the ways to structure a creative solution so that, all right, well we're going to take $60,000 from this retirement account.   We're going to refinance for $40,000 and that way we're going to get rid of this mortgage, you're only going to have a $40,000 mortgage outstanding. Everyone's going to be happy, no weird liability, etc. We've done that time to time with people as well because that's just the solution that makes sense. It's really about and this podcast is about and what I'm here to help you with is understanding your options, understanding the complexity involved, understanding that some of these decisions even though conceptually they're pretty basic, refinancing a mortgage actually in practice, they have a lot more complications to them that you don't often think about. And I want you to be informed and really understand, hey, I need to think about this decision further and really make sure that whatever my spouse and I decide is really the appropriate financial decision and feasible financial decision for both of us and puts us in the best position possible.   And making sure that you're not forgetting anything that is a very important as part of this process. And refinancing the house in theory very simple, in practice very complicated. And it's been coming up every week on calls and so I want to make sure you're all informed as to how much there is to such a very, in theory, simple decision.