Divorce isn’t just an emotional process—it’s also a financial one, especially when it comes to the marital home and mortgage. For many couples, decisions about the family home are among the most difficult to make, and the wrong approach can create long-term financial challenges.
The options available during divorce depend on several factors, including how the property is titled, how it was financed, and how much equity exists. Add in income changes, support payments, and new mortgage requirements, and the situation can quickly get complicated.
That’s why it’s so important to work with a mortgage professional who specializes in divorce lending. Too often, mistakes happen when well-meaning professionals don’t fully understand the unique rules and opportunities available in these situations. Below, we’ll cover two of the most common mortgage mistakes made during divorce—and how to avoid them.
Mistake #1: Mismanaging Home Equity Distribution
When one spouse keeps the home, they usually need to pay the other spouse their share of the equity. A common misconception is that the only way to do this is through a cash-out refinance.
The problem? Cash-out refinances are limited to 80% loan-to-value and often come with higher interest rates. This can restrict access to equity and make the new mortgage more expensive than necessary.
A Better Option: The Equity Buyout Refinance
Mortgage underwriting guidelines allow for a more favorable solution: an equity buyout rate-and-term refinance. If the marital settlement agreement includes specific language identifying the refinance as an equity buyout, it’s not considered a cash-out transaction.
This matters because:
- Borrowers may access more equity than with a cash-out refinance.
- The new loan often comes with better interest rates and terms.
Pro Tip: Depending on your situation, there may also be title seasoning requirements for the spouse keeping the home, so it’s important to work with a divorce-trained mortgage professional.
Mistake #2: Leaving an Ex-Spouse’s Name on the Existing Mortgage
Another major mistake is failing to remove the vacating spouse’s name from the current mortgage. While property ownership may transfer in the divorce decree, the mortgage itself is a separate legal obligation.
If a spouse remains on the mortgage but no longer lives in the home, the payment will still count against their debt-to-income ratio, which can make qualifying for a new mortgage nearly impossible.
How to Avoid This Mistake
The marital settlement agreement should clearly assign responsibility for paying the existing debt. When structured properly, the court-ordered assignment of debt can sometimes allow the obligation to be excluded from the departing spouse’s debt-to-income ratio—helping them qualify for a new home loan in their name alone.
The Bottom Line
Divorce is stressful enough without adding unnecessary mortgage mistakes to the mix. By understanding how to handle home equity distribution and ensuring that mortgage responsibilities are properly documented, divorcing couples can avoid costly setbacks and move toward financial stability with confidence.
Working with a Divorce Mortgage Expert means you’ll have guidance every step of the way—from structuring your settlement agreement to securing the right financing option for your future.
👉 Don’t let a mortgage mistake derail your fresh start. With the right guidance, you can protect your finances and build a stronger path forward.
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