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The importance of refinancing a home after a divorce

As couples work through a divorce and the division of property, they might need to look at how the mortgage is handled while determining ownership of the family home. While the courts may declare that the house legally belongs to one spouse or the other, the lender that is entitled to payments because of a mortgage agreement may not automatically release the party that no longer owns the home from liability for the debt. According to a recent report, the contracts signed when the mortgage was obtained are not affected by the property division rulings made by family law courts. This means that the partner who moves out can eventually be held responsible for missed payments if the mortgage is not modified.

However, there is a way to address this potential problem. If selling the home and splitting the proceeds is not an option for any reason, then the individual remaining in the home should refinance the mortgage. This might restructure the payments and remove the other party from liability for nonpayment. In addition to protecting that party from legal action taken by the lender, this also removes the mortgage from that person's credit score.

During the refinancing process, the spouse that will retain ownership may cash out some equity to repay the other party for prior contributions made to the home, such as money for the initial down payment. If there is not enough equity in the house to buy the other partner out, then that person may accept gifts from friends and family members to give their former spouse to reimburse him or her for the contributions.

As this example shows, having a divorce settlement might not enough to protect the interests of both spouses. Liability for jointly held loans might be only one area that might not be addressed by a divorce agreement. A lawyer who is familiar with family law and divorce cases might be able to help a client anticipate and address other concerns that fall outside the scope of basic divorce documents.

Source: Credit.com , "How to Divide Your House in a Divorce", Scott Sheldon, July 09, 2014

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