Getting divorced comes with some big life choices – and one of the most important is what to do with the family home. If you have children (and a sizable mortgage), this choice may be even more complicated.
Take the hypothetical example of Tom and his ex-wife Amy who had an acrimonious divorce. Instead of selling the house, they decided to keep it so that their two young children could stay in the family home. Tom went to a nearby rental apartment.
Since Amy runs a few sides, she doesn’t have what lenders consider fully verifiable income. So Tom agreed to continue paying the mortgage – under his name – and Amy would pay him back when she was paid with her retirement income.
They never had any problems with this arrangement. But now Tom is thinking about buying a condo, and he’s worried he’ll have trouble getting a second mortgage—even though Amy is paying him back for the mortgage payments on the family home.
Such situations are becoming more common, especially among divorced or separated parents who are trying to prioritize stability for their children. But lenders don’t evaluate mortgages based on family dynamics.
And misunderstanding how it works can lead to loan rejections, borrowing limits or higher rates.
If you have a joint mortgage, you are both responsible for it – even after the divorce. Some couples choose to sell the house and split the proceeds, refinance the mortgage in one spouse’s name, or buy one spouse from the other.
Keep in mind, a mortgage is not the same as a deed (a document that proves you have title to the property). So, you can keep the title regardless of the mortgage (and vice versa).
Some divorcing couples choose to leave the mortgage as is. In Tom’s case, he is responsible for the debt from a legal standpoint, which could affect his ability to get a second mortgage.
According to Mortgage Reports, a borrower’s debt-to-income ratio (DTI) plays an important role when qualifying for a new mortgage. If a person is listed on another mortgage, this obligation is included in their DTI calculation and can affect their ability to qualify – even if they are not the one making the payments on the existing loan (1).
Your DTI is calculated by taking all of your debt, including your mortgage, car loan and credit cards, and then dividing it by your gross income.
The higher your DTI ratio, the more difficult it will be to qualify for a mortgage. Lenders generally want to see a DTI of 36% or less, although some may allow DTI in the 45% range. In Tom’s case, his DTI appears to be higher than it actually is, because his name is on the mortgage that his ex-wife is paying him.
Note that if you pay child support – as Tom does – it will count against your DTI just like car loan or credit card debt.
According to Mortgage One, this reduces the amount you are able to borrow. If you apply for a mortgage jointly with a new spouse or partner, your support obligations may also affect their eligibility, depending on how the application is structured (2).
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When applying for a second mortgage, having a divorce decree stating that your ex is responsible for the first mortgage can help your case – along with proof of payment, such as bank statements that show your ex is paying you back each month.
But this is still no guarantee, and the lender may view you as a legal liability. You will be evaluated by lenders based on one income instead of two, which can reduce your borrowing power. You may also be charged a higher mortgage rate.
Getting around this may mean refinancing your first mortgage or getting yourself out of it altogether. If you refinance and take over your previous mortgage, there will be a refinancing fee (typically 3-6% of the outstanding loan balance) (3).
And your ex may not be approved for refinancing if they have a low credit score or high debt (or, as in Amy’s case, irregular income).
However, if Amy can document a steady income over a 12-month period (which includes wages and/or child support) and maintain a good credit score, she can finally get a mortgage under her own name—which is great for her. and Better for her ex. Their divorce decree should clearly state their financial arrangement to show documented income.
Amy can see if she qualifies for an FHA loan, which is backed by the Federal Housing Administration, which has more flexible credit requirements and lower DTI requirements. Or, she can see if she can find a new co-signer (perhaps her parents) and then jointly buy the house from Tom.
Keeping the family home can provide stability and continuity to children during divorce. It can also be a strategic financial decision. But, ultimately, refinancing may be the best path to financial freedom—for both partners.
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Mortgage Reports (1); mortgage one (2); Rocket Mortgage (3)
This article provides information only and should not be used as advice. It is provided without warranty of any kind.
