Divorce is one of life’s most challenging transitions, with many emotional, legal, and financial complexities. Often, the marital home is one of the most significant financial assets and emotional anchor. Handling the mortgage tied to that home can be particularly tricky, and missteps can have long-term consequences. To help my clients navigate this issue, I asked mortgage broker and owner of Mortgage Wealth Advisors, Warren Goldberg, to explore the top five mortgage mistakes divorcing people make—and how to avoid them.
1. Underestimating the Affordability of Staying in the Home
Generally, at the end of a divorce case, one spouse will buy out the other’s share in the marital home by refinance. Before you agree to do that, consider whether the retaining spouse can qualify for a mortgage or even afford the new payments.
To prevent future financial strain, take a hard look at your post-divorce budget. Work with your divorce attorney and/or a financial advisor to determine if keeping the house is truly sustainable or if selling and downsizing might be a better option.
2. Overlooking Refinance Requirements
Make sure to consult with a mortgage broker before you sign a divorce agreement, to ensure that the spouse who is keeping the house will be able to refinance or assume the mortgage. Don’t assume the person keeping the house can simply take over the mortgage without refinancing. In most cases, lenders won’t release one spouse from a mortgage without a formal refinance.
3. Ignoring Tax Implications
Failing to consider the legal and tax implications of mortgage-related decisions can lead to costly mistakes. For example, selling a home during a divorce may have capital gains tax consequences, especially if it’s been owned for a long time. You are entitled to a larger capital gains exclusion ($500,000) if you are selling the home as a couple as opposed to a single person ($250,000).
4. Failing to Refinance after Divorce
Failing to refinance can leave both parties financially entangled. If the spouse staying in the home defaults, it affects the other spouse’s credit score, even if they’re no longer living there. To avoid this, ensure refinancing terms are outlined in the divorce agreement and completed as part of the settlement process.
5. Ignoring the Impact of Debt on Mortgage Qualification
When getting divorced, concern for your credit might be the last thing on your mind. However, joint debts like credit cards, car loans, and the mortgage can significantly impact your credit score, particularly if payments are missed during the divorce process. In turn, a poor credit health will impact your ability to qualify to refinance the mortgage.
To protect yourself, obtain a copy of your credit report early in the divorce proceedings. Monitor your score regularly and make sure you timely pay your debts.
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Warren Goldberg is a Certified Mortgage Planning Specialist® and is President of Mortgage Wealth Advisors. To learn more, visit www.MortgageWealthAdvisors.com or call Warren at 516-584-7218.
